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W11_MT1_free-response answers(2)

W11_MT1_free-response answers(2) - Blue-book 25 out of 50...

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Blue-book – 25 out of 50 pts. (2 qns., 12 pts. each + 1) Answer these questions in your blue-book. Show your work and intermediate steps for partial credit. Points are split equally across all sub-parts. Your score will only be based on the marks in your blue-book. You will not receive any credit for anything written on your exam paper. You will receive 1 extra point for correctly writing your name, perm number, version (A,B,C, or D), and TA’s name on your blue-book. 1. Douglas has only one asset, a bike worth $200, that he keeps locked up outside overnight. With probability π s = . 20 thieves steal the wheels and seat, and he is left with only the $50 frame. (a) Douglas can buy as much bike-theft insurance as he would like from the Isla Vista Insurance for STudents Association (IVISTA), which charges p = 2 / 3 dollars per dollar of coverage. Let c ns be his consumption if his bike is not stolen and c s be his consumption when it is stolen. Write the equation of his state-contingent budget constraint, with c ns
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