How much would john be prepared to pay for full insurance

Reference no: EM132201150

Question: A) John has a utility function over goods 1 and 2 of the form U = X₁⁷X₂¹. He has an endowment of 3 for good 1 and 7 for good 2. The price of good 1 is $5 and price of good 2 is $7. Derive the expressions of both goods' ordinary demands. Calculate gross and net demand for each good.

B) In another scenario, he has a utility function over wealth; U = W^1/14. He is looking for insurance to cover his loss if robbery occurs. If he is not robbed, his wealth will be $37000. If he is robbed, his wealth will be $9000. The propability of robbery is given 2%. How much would John be prepared to pay for full insurance? How much would he be paying for actuarially fair insurance?

Reference no: EM132201150

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