The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.5P
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The worth of consumer's house is 160, and her utility
function is u(w) = √w. The probability of outbreak of fire is
p = 1/2, and the fire will make 120 amount of loss of worth
of house. Under the given conditions, consumer can join
insurance that pay insurance money as B by pay insurance
fee qB.
(a) Find the amount of insurance that consumer will join.
(b) Derive the condition that consumer will not join
insurance.
(c) Derive the condition that make consumer join full
insurance.
(d) Find the B, when the q is given as q = 3/5
Transcribed Image Text:The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5
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