Suppose that the consumer can purchase insurance coverage of size C from a representative insurance firm at a premium of 7 per unit of wealth insured, but that the firm charges an additive deductible. Thus if the consumer purchases C units of insurance, the firm pays out only (Cd) if the loss occurs, where 0 < d < C. 4.1 For an arbitrary choice of insurance coverage, C: (i) give the two possible values of final wealth, (ii) define the certainty equivalent of wealth mathematically and give a verbal explanation of what it means; and (iii) find and expression for it for this consumer. 4.2 Set up the consumer's problem and derive the first order condition that determines the optimal choice for insurance coverage C*. Rearrange the condition so that you can give a clear economic interpretation of the optimality condition. 4.3 Find the optimal choice of insurance C* in the case of actuarially fair pricing, π = p, and interpret your result.

Suppose that the consumer can purchase insurance coverage of size C from a representative insurance firm at a premium of 7 per unit of wealth insured, but that the firm charges an additive deductible. Thus if the consumer purchases C units of insurance, the firm pays out only (Cd) if the loss occurs, where 0 < d < C. 4.1 For an arbitrary choice of insurance coverage, C: (i) give the two possible values of final wealth, (ii) define the certainty equivalent of wealth mathematically and give a verbal explanation of what it means; and (iii) find and expression for it for this consumer. 4.2 Set up the consumer's problem and derive the first order condition that determines the optimal choice for insurance coverage C. Rearrange the condition so that you can give a clear economic interpretation of the optimality condition. 4.3 Find the optimal choice of insurance C in the case of actuarially fair pricing, π = p, and interpret your result.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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