ECONOMICS
C61D0001d01

# C61D0001d01 - Suggested Answers for Problem Set#2 Econ 441...

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intervention. Note that the fact that dumping raises the price Adam faces for fish does not mean that he internalizes the externality. He internalizes only the effect of dumping on his consumption of fish, not the effect on Eve’s consumption of fish. 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 to high education spending. FALSE We might want to subsidize education since education creates a positive externality. 3. Your expected utility without insurance is EU =.9log (2*50) +.1log(2*20) = 1.960. The actuarially fair price for insurance is the probability of loss times the amount of the loss, so .1*30,000 = \$3,000. Your expected utility if you buy the insurance is EU = log(2*47) = 1.973. Let the amount you pay for full insurance be x. Then your expected utility from insurance is log(2*(50-x)). So the most you will pay for insurance is the solution to log(2*(50-x))= 1.960, x =\$4,399.45 4. 1) Each superhero's utility exhibits diminishing marginal returns (you can see this by simply plotting the level of utility against consumption, or by finding that the second derivative is negative). This is equivalent to saying that the individual is risk averse. Since
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• Spring '10
• Jannett

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