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Microeconomic Theory

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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Consider a state-contingent consumption problem for Ben. Ben has $400 to start
with, and his utility function is
u(W) = VW,
where W is his wealth. He faces a financial loss of $150 with probability 0.2. He also
has an opportunity to purchase an insurance at the price of $0.20 for $1 coverage. If
you plot his state-contingent consumption on a diagram where the accident state on
the horizontal axis, and the no-accident state on the vertical axis, then the slope of
his budget line will be

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