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Problem set 8

# Problem set 8 - c Consider two assets one with a certain...

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Problems for Tutorial 8 Question 1 Assume a household has an initial wealth of \$100,000 and a 5% change of incurring a loss of 10,000. There utility function is given by ln(W), where W is their wealth. Suppose that they can be insurance at cost of \$0.05 per \$ of coverage. a. What is the optimal amount of insurance for the household to buy? b. Suppose now that the price of insurance increases to \$0.051. Utilizing the first-order condition, what is the optimal amount of insurance for the household to buy? What if the price increases to \$0.052?

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Unformatted text preview: c. Consider two assets, one with a certain return of 5%, and a risky asset with a 30% probability of a 2% return, and a 70% probability of a 10% return. Assuming a logarithmic expected utility function, and an initial wealth of \$100,000, how much of their wealth should the household hold in the risky asset? (To do this, you first need to put down the general problem, and utilize the FOC to calculate the optimal share.)\ Question 2 Question 3 Question 4...
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Problem set 8 - c Consider two assets one with a certain...

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