77F91F51d01 - Professor Brown Economics 441 Problem Set#2...

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Professor Brown Posted October 8, 2007 Economics 441, Problem Set #2 Due in discussion October 18-19, 2007 1. (1 point each) Please do problems 3 and 4 from Chapter 10 in your text. 2. (1 point) True, false, or true under certain conditions but false under others? In any case explain ! a) In Eden, Eve does the fishing and Adam makes the clothes – they then barter clothes for fish. Adam dumps dye into the lake, which lowers Eve’s fishing yield. There is no need for a higher power to intervene to address Adam’s negative externality on Eve. b) There is no reason for state or federal subsidization of education, since people who live in areas with low educational spending prefer low taxes over high education spending. 3. (3 points) Your utility function is given by log(2 ) U C = , where C is consumption. You make $50,000 per year but face a risk of illness. There’s a 10 percent chance that in the next year you will become ill and incur medical costs of $30,000. What is your expected utility without insurance? Suppose you can buy insurance that charges you a premium no matter what happens and then will cover your medical expenses should you fall ill. What is the actuarially fair price for such a policy? What is your expected utility if you buy it?
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