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Economics 217
Spring 2010
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4
(Answers to
due in class Tuesday, March. 16th, to be discussed
questions 12
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.
 Spring '10
 JoshuaKinsler
 Economics

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