Show that relative to individual one

Reference no: EM132174829

Question: Suppose that there are two risk-averse individuals with the same utility function u = (w0.7/0.7), where w is wealth. Their initial wealth endowment is w = $70, but their income is subject to two different kinds of risks. Individual 1 faces the following risk: with 50 percent probability she loses $10, and with 50 percent probability she does not lose anything. Individual 2 faces the following risk: with probability 1/2 she loses $20, and with 50 percent probability she loses $10. Show that relative to individual one, individual 2 is ready to pay a higher premium in order to be fully insured. (Full insurance in this context means that income remains the same in all states of nature.)

Reference no: EM132174829

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