pset3_s10 - Economics 217 Spring 2010 Problem Set 3...

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Economics 217 Spring 2010 P r o b l e m S e t 3 (Answers to due in class Tuesday, March 2nd, to be discussed Friday, questions 1-2 March 5th; ) Please denote which recitation you plan to attend on Friday 1. Suppose persons can either choose to park in the street or park in a garage. Parking in the street is free; parking in a garage costs $20. If a person parks in the street there is a 20 percent chance their car is stolen. If they park in a garage there is only a 10 percent chance their car is stolen. The car is worth $500. If the car is not stolen an individual has total resources to spend of $2000. If the car is stolen they have (in the absence of insurance) only $1500. A person has a utility function that exhibits risk aversion, where are the resources to spend. YÐCÑ C a) Suppose you operate an insurance company. Competition requires that you offer customers fair-priced insurance. That is, you charge a premium each period equal to the expected value of claims. Suppose you cannot monitor whether individuals park on the street or in a garage. If
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This note was uploaded on 04/19/2010 for the course ECO 231W taught by Professor Joshuakinsler during the Spring '10 term at Rochester.

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pset3_s10 - Economics 217 Spring 2010 Problem Set 3...

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