ps4_fall2011ECONW3211

ps4_fall2011ECONW3211 - Department of Economics Columbia...

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Department of Economics W3211 Columbia University Fall 2011 Probl e m S e t 4 Int e rm e diat e Mi c ro ec onomi c s Prof . S e yhan E A rkona c 1 . Bob's utility function is shown in the Figure below. He currently has $100 worth of property, but there is a 50% chance that all of it will be stolen. An insurance company offers to reimburse Bob for his loss if the money is stolen. What is the most that Bob would pay for such a policy? Explain.
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2 . An individual has an initial wealth of $35,000 and might incur a loss of $10,000 with probability p . Insurance is available that charges $ gK to purchase $ K of coverage. What value of g will make the insurance actuarially f air ? If she is risk averse and insurance is fair, what is the optimal amount of coverage? 3 . Derive the Arrow-Pratt measure of risk aversion for the following utility functions. Which represents the greatest level of risk aversion according to the measure? a
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ps4_fall2011ECONW3211 - Department of Economics Columbia...

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