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.

User Account

All Pages