micro-fall2007-25 - Demand for Insurance The optimal...

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Unformatted text preview: Demand for Insurance The optimal insurance plan Choose y 1 and y 2 so as to maximize EU [( y 1 ; 1 ; y 2 ; 2 = 1 & 1 )] = 1 u ( y 1 ) + ( 1 & 1 ) u ( y 2 ) under the constraints: y 1 : = W & L + ( 1 & ) D , y 2 : = W & D y 1 , y 2 Conditions for an optimum: y 1 + y 2 ( 1 & ) = ( W & L ) + W ( 1 & ) MRS = 1 u ( y 1 ) ( 1 & 1 ) u ( y 2 ) = 1 & Ani Guerdjikova ECON 313 Fall 2007 263 / 267 Demand for Insurance Example u ( y ) = ln y u ( y ) = 1 y In the optimum, MRS = 1 & y 2 ( 1 1 ) & y 1 = 1 y 1 = 1 [( W L ) + W ( 1 )] y 2 = 2 [( W L ) + W ( 1 )] 1 Ani Guerdjikova ECON 313 Fall 2007 264 / 267 Demand for Insurance The optimal insurance plan 6- r ........... . . . . . . . . . . . . . . . . . . . . . . . . . . . . W W & L y 1 y 2 @ @ @ @ @ @ @ @ @ @ @ @ 1 & . ....
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This note was uploaded on 04/30/2008 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell University (Engineering School).

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micro-fall2007-25 - Demand for Insurance The optimal...

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