Reference no: EM13148267
1. A consumer always spends 40% of his income on good x and the remainder on good y. The Price elasticity of the demand for both z and y will be unity. True or false?
1. Lynn's income is £2000 and she is risk averse. The probablity someone sliping on her stairs is 1/8, If this happen, she be sued for 1;1000 and will bas e to pay that amount- She can Purchase insuranen at a price of £0.30 per Pound of coverage.
(a) Show the contingent commodity framework with consumption if riot sued on the horizontal axis and consumption if sued on Yerticnt axe and illustrate Lyrme's situation before an accident occurs.
(b) Show in your graph how the equilibrium amount of insurance coverage is determined.
(c) Show in your graph how the equilibrium amount of insurance coverage is determined if the probability of someone slipping increases to 1/4, but the premium is unchanged.
3. Consider two individuals M and F who must split 20 units of good X and 10 units of good Y. Suppose we can represent M's preferences
with the utility function
UM = X2L YM
and F's preferences with the utility function
UF = Min{XF,2YF}
where XM and XF indicate their X consumption, while YM and YF indicate their Y consumption. Assume that M and F's initial endowments are XM = 8 XF = 12, YM = 7, and YF = 3.
(a) Derive the marnal rate of substitution for M.
(U) Interprgt F's utility function..
(c) Find and graph the contract curve.
(d) What is the ratio of the price of X to the pride Y in competitive equilibrium?
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