E2 a. Ralph is choosing whether to purchase healthinsurance. Here are the features that define hissituation:He currently has $20,000 in initial wealth andfaces a 2% chance of a serious illness that will cost$8,000 to cure. (He therefore simultaneously facesa 98% chance that he won't face harm.)He has the option to purchase an insurance policyfor the price of $1,000. If he purchases insuranceand gets ill, his insurance company willcompensate him for the $8,000 cost of the cure.His utility function for money is U(M) = M.He has the option to not purchase insurance, buthe must pay a fine of $X if he chooses to gouninsured.a. Set up the equation (but do not solve it) tofind the amount of the fine (X) that makes himindifferent between purchasing insurance andgoing uninsured.b.True or false, and explain: According toSeabright, because of information asymmetriesbetween consumers and sellers, consumershave to put in a lot of time and effort to ensurethat sellers are trustworthy.

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Ralph is choosing whether to purchase health insurance. Here are the features that define his situation: He currently has $20,000 in initial wealth and faces a 2% chance of a serious illness that will cost $8,000 to cure. (He therefore simultaneously faces

Ralph is choosing whether to purchase health insurance. Here are the features that define his situation: He currently has $20,000 in initial wealth and faces a 2% chance of a serious illness that will cost $8,000 to cure. (He therefore simultaneously faces

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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Kindly assist on the questions below 1) Dan is an expected utility maximizer with a utility function over wealth given by : u(w) = 2√w +10 Dan faces a gamble of where there are equal chances to win $9 or $16. The certainty equivalent of this gamble is a) 3.5 b) 17 c)2√13 +10 d) not enough information to compute e) 20 2) Consider a expected utility maximizing consumer with preferences represented by u(w)= w2 If they face a loss that occurs with a 15% probability (select all that applies) a) fair insurance will be priced at 15% per dollar b) fair insurance will leave them with wealth equal to their certainty equivalent c)they will choose to fully insure themselves with fair insurance d)they will always buy more insurance than a risk neutral person
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Jamal has a utility function U= W1/2 where Wis his wealth in millions of 'dollars and Uis the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with a probability of 0.6 and $9 million with a probability of 0.4. a. Graph Jamal's utility function. Is he risk-averse? Explain. b. Does A or B offer, Jamal, a higher expected price? Explain your reasoning with appropriate calculations. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.) c. Does A or B offer Jamal a higher expected utility? Again, show your calculations. d. Should Jamal pick A or B? Why?