Write out the individuals budget constraint in case

Assignment Help Business Economics
Reference no: EM131003525

Suppose an individual consumer has preferences over consumption c given by u(c) = c^1/2 . The individual faces uncertainty of the following form: With probability π the individual has wealth of ω which she can spend on consumption; with probability 1−π the individual suffers a negative shock which reduces her wealth to zero. An insurance company sells insurance against this shock at a per unit premium of p > 0. A unit of insurance pays a single unit of consumption in the bad state. Let z represent the amount of insurance the individual purchases.

(a) Write out the individual’s expected utility.

(b) Write out the individual’s consumption in each state as a function of the amount of insurance she purchases z. Write out the individual’s budget constraint in this case.

(c) Graph the individual’s decision problem in the space of consumption in the good state (i.e., cG when wealth is equal to ω) and the bad state (i.e., cB when wealth is equal to zero).

(d) Find the individual’s optimal consumption (i.e., consumption levels in each state) as a function of p, π and ω.

(e) Suppose the insurance company selling insurance is in a competitive industry. Explain what will happen to the price of insurance and what this will represent for the consumer.

Reference no: EM131003525

Questions Cloud

Determine the velocity of the second log : The lumberjack runs to the other end of the log (mass=230 kg), attaining a velocity of +3.6 m/s relative to the shore, and then hops onto an identical floating log that is initially at rest. Neglect any friction and resistance between the logs and..
Calculate the cross price elasticity-income elasticity : Assume that demand for good X is a function of its price (PX), the price of good Y (PY), and Income (M) as follows: QX = {(M + PY)/(2PX)} - 1 Given the following values for these variables: PX = 2; PY = 5; M = 51 (a) Calculate the (own) price elastic..
Prepare the long term liabilities section of cps : Prepare the long-term liabilities section of CPS Transportation's December 31, 2011, balance sheet.
The stock market is sometimes criticized as a giant casino : The stock market is sometimes criticized as a giant casino in which people act as speculators rather than making productive investment in new physical capital (i.e., the type of business expenditure on plant and equipment that is counted in GDP as Bu..
Write out the individuals budget constraint in case : Suppose an individual consumer has preferences over consumption c given by u(c) = c^1/2 . The individual faces uncertainty of the following form: With probability π the individual has wealth of ω which she can spend on consumption; with probability 1..
Re economies and diseconomies : Re economies and diseconomies, suggest factors that will make the average cost of production lower for a larger firm than for a smaller firm. What are factors that may force up the average cost of production?
Legal restrictions and regulations for employment : Which of the following are reasons that economists use to explain the decrease in the natural rate of unemployment between the 1980s and the early 2000s in the United States? Each bin contains more than one correct answer and all items should be plac..
The cost to the government of buying firms unsold units : Consider a market where supply and demand are given by QXS = -14 + PX and QXd = 82 - 2PX. Suppose the government imposes a price floor of $37, and agrees to purchase any and all units consumers do not buy at the floor price of $37 per unit. Determine..
At equilibrium what concentration of hydrogen remains : A aqueous 5L salt solution contains 0.5kg of NaNO3. Calculate the melting point, boiling point, vapor pressure and osmotic pressure of the solution at 25C. Assume density = 1.0g m/L.

Reviews

Write a Review

Business Economics Questions & Answers

  Migration is unimpeded and costless

Assuming migration is unimpeded and costless, which of the following statements is most accurate about the effect of immigration on wages in both the origin and destination nations?

  Market segments must rate favorably on five key criteria

To be useful, market segments must rate favorably on five key criteria. In the ________criterion, effective programs can be formulated for attracting and serving the segments.

  What quantities will the industry and each firm supply

Assuming 100 identical firms in the industry (further assume that factor prices remain the same) what quantities will the industry and each firm supply when the product’s price is $9? What if prices are below $5?

  Suppose that the investor has a level of risk aversion

Consider an investor with preferences given by the utility function U = E(r) – 0.5Aσ2 and there are two portfolios with the following characteristics: Suppose that the investor has a level of risk aversion of A = 2. Which portfolio should the investo..

  Unionized plants than in non-unionized environments

Explain why cooperative approaches may stand up to legal review more easily in unionized plants than in non-unionized environments.

  Domestic market

Ugula sells rubber band in the domestic market. Their equilibrium price is $10. Ugula does not have competitive advantage in the production of rubber band. 1) Ugula now allows free trade. illustrate and explain what happen. 2)if a tarriff were put in..

  What is the accounting profit you project for your business

You are thinking about becoming a Paradise Coffee franchisee. Franchisees are offered a business specializing in producing an exclusive line of exotic coffee drinks (similar to Starbucks). What is the estimated explicit (accounting) cost of your prop..

  Two kinds of people in society who are equally represented

Suppose there are two kinds of people in society who are equally represented —those with 20% chance of developing diabetes next year, and those with 2% chance of developing diabetes next year. Please explain the difficulty you face as an insurer in f..

  How do unions at gm and ford affect employment levels

Are unions good or bad for economy. How do unions at GM and Ford affect employment levels and wages How do unions affect or industries in terms of employment and wage levels.

  Senior citizens and students have a relatively more elastic

Senior citizens and students have a relatively less elastic demand compared to other potential moviegoers. The government requires lower prices for senior citizens and students. Senior citizens and students have a relatively more elastic ..

  Source of class conflict and potential social change

Marx argues that economic changes are the source of class conflict and potential social change. Explain Marx’s argument by either using the historical example of the transition from feudal production to capitalist production, or explain this by perha..

  Tend to rise in response to a natural disaster

Prices (fuel, water, grocery items, etc.) tend to rise in response to a natural disaster.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd