pset4_s10 - Economics 217 Spring 2010 Problem Set 4...

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Economics 217 Spring 2010 P r o b l e m S e t 4 (Answers to due in class Tuesday, March. 16th, to be discussed questions 1-2 Friday, March 19th; ) please denote which recitation you plan to attend on Friday 1) You have $200. You have $100 in your wallet (the rest, $100 in your sock). Suppose there is a 20% chance of losing your wallet. Your utility function is ln(c) , where is your spending. - (Without insurance this would be $200 if your wallet is not lost, $100 if it is.) Suppose you can buy insurance that pays you $ in the event that your wallet is lost. This insurance requires you D to pay an insurance premium, $ , to purchase. This insurance is "fair" priced, so that the : premium equals the expected value of claims. a) What is your optimal choice for ? D b) Suppose the government puts a tax on insurance. For each $1 you pay in premia, you must pay a tax of 50 cents to the government. What is your optimal purchase of insurance? Are you completely insured?
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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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