Set 3: Due Tuesday October 31, 2023. In class, only in class. 1.Short Questions and Problems, 8 points each. Remember to justify your answers. a) A risk-averse individual is offered a choice between a gamble that pays $1000 with a probability of 25% and $100 with probability of 75%, or a payment of $325. Which would he choose? b) What if the payment in a) was $320? c) Why might a neighborhood group have a harder time self insuring for flood damage versus fire damage? What if the neighborhood was in southern California (there a lot of wild fires in Southern California, especially in the canyons)? d) Most insurance companies charge a price per dollar of insurance which is higher than the probability of the event they are insuring. Can you name and discuss at least two reasons this could be the case? Explain the consequences of this behavior for the demand for insurance even among risk averse individuals. e) Consider an individual with a Utility function U= w4. Show with an example of a lottery and proper calculations, as those done in class, that this utility function does not express risk aversion. 2.Verdadero o Falso, 12 points each