Find the optimal insurance coverage

Reference no: EM13770564

1. Demand for Insurance

Consider the utility function u(x) = log x.

(a) Set up the individual's expected utility maximization problem. Derive the first-order condition.

(b) Find the optimal insurance coverage, C, when insurance is actuarially fair (i.e. q = p).

(d) Comparative Statics. Use the first order condition from part (a) to find change in C = C(W, L, q, p) with respect to

(a) Probability

(b) Loss

2. Supply of Insurance

Suppose there are two risk averse individuals, Cate and Dirk. They both face an identical independent risky prospect: each individual has a 50% chance of earning $100 and a 50% chance of earning $10. Let u(x) = log x be the utility function.

(a) Find Dirk's expected utility from this prospect.

(b) Suppose Cate and Dirk decide to pool their incomes. They pay their realized income into the pool and they each get half of the total income of the pool. Find Dirk's expected utility under the pooling scheme. (Hint: Since the two prospects are identical and independent, there are four possible outcomes).

(c) Show that Dirk's expected utility under the pooling scheme is greater than his expected utility without the pooling scheme.

(d) Compare the variance of the risky prospect with the pooling scheme and without the pooling scheme.

Reference no: EM13770564

Questions Cloud

Catch and handle the error thrown by the code : Catch and handle the error thrown by the code. Redirect the user back to the login screen and display a friendly error message stating that the credentials were incorrect

Good management information system : An organization does not have a good Management Information System (MIS) in place to help manage all of their data. What are some of the possible problems this could cause for decision makers?

Economic impact generated by the law : As an environmentalist, you are very interested in how economics plays a role in determining how many and what type of environmental laws are passed. There are many environmental laws that are determined by economic conditions.

Importance of organizational learning : Evaluate the importance of organizational learning. Provide examples of how learning and change can impact one another.

Find the optimal insurance coverage : Find the optimal insurance coverage, C, when insurance is actuarially fair and find the optimal insurance coverage when q > p.

Write a paper that evaluating effectiveness of advertisement : Write a paper that Evaluating the effectiveness of an Advertisement. Imagine that you work for an advertising agency and your boss wants you to evaluate the effectiveness of the ad.

Define the terms subject matter jurisdiction : Define the terms subject matter jurisdiction and personal jurisdiction. What are the requirements of personal jurisdiction in a federal court

Determine the needs of the learning team : Assume you are the manager of your learning team and need to develop a plan that will address the characteristics of your group and yourself as the leader. This plan can be used to determine the needs of the learning team and is a tool for members..

What can legally astute manager do to protect trade secrets : What can a legally astute manager do to protect "trade secrets?" Explain, whether or not, simply buying a counterfeit handbag, or athletic jersey, is a victimless crime

User Account

All Pages