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Compute the insurance amount against the losses.

1. Suppose a risk-averse consumer has an initial wealth of $5,000 and a utility function U(M) √M.. He faces an 80 percent chance of losing $4000, and a 20 percent chance of losing $0. Illustrate what is the most a consumer would pay for insurance against these losses? Draw a diagram to illustrate this amount.

2. Suppose a risk-averse consumer has an initial wealth of $7,000 and a utility function U(M) = InM. He faces a 70 percent chance of losing $4000, and a 30 percent chance of losing $6,000. Illustrate what is the most a consumer would pay for insurance against these losses? Draw a diagram to illustrate this amount.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M917444

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