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Unformatted text preview: →∞ c γ (There are several ways to do this problem; depending on how you do it, you might ﬁnd it useful to use L’hospital’s rule.) 3. Tammy owns a car worth $10,000; in addition to her car, she has wealth of $40,000. Because she lives in a bad neighborhood, the probability of her car being stolen is π B = . 1 (so the probability of her car not 1 being stolen is π G = . 9. Tammy’s insurance company oﬀers to sell her as much car insurance as she wants at the (unfair) price of $0.11 per dollar of insurance. (Remember that this gives implicit/state prices p G = . 89 , p B = . 11.) Tammy’s utility function is U ( x, y ) = π G u ( x ) + π B u ( y ) where x = wealth if her car is not stolen, y = wealth if her car is stolen. How much insurance should Tammy buy (a) if u ( w ) = w 1 / 2 (b) if u ( w ) = log w (c) if u ( w ) =1 /w 3 2...
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This note was uploaded on 04/01/2010 for the course ECON 180052110 taught by Professor Mcdevitt during the Winter '09 term at UCLA.
 Winter '09
 McDevitt

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