Lucy and Henry each have $8082. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of buying a units of insurance, with each unit costing $0.1. Each unit of insurance pays out $1 in the event the loss occurs. The cost of the insurance policy is paid regardless of whether the loss is incurred. Lucy's utility is given by ux) = x, Henry's utility is given by u"(x) = VT. %3D Answer the following: (If rounding is needed, only round at the end and write your answer to three decimal places.) e) i What is Henry's utility maximising choice of a with the new price of 0.2? If more than 1 exist, enter the largest a.

Lucy and Henry each have $8082. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of buying a units of insurance, with each unit costing $0.1. Each unit of insurance pays out $1 in the event the loss occurs. The cost of the insurance policy is paid regardless of whether the loss is incurred. Lucy's utility is given by ux) = x, Henry's utility is given by u"(x) = VT. %3D Answer the following: (If rounding is needed, only round at the end and write your answer to three decimal places.) e) i What is Henry's utility maximising choice of a with the new price of 0.2? If more than 1 exist, enter the largest a.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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