Let's consider the consumer who wants to buy insurance. Consumers are expected to spend as much income as m if no accident occurs, but if an accident occurs, all income is lost. The probability of an accident is α ∈ (0,1). To prepare for this accident, consumers can buy insurance that pays p as insurance premium and receives as much as s in the event of an accident. The consumer's utility function is u(c) = 2√c, where c is the level of consumption. Consumers consume all remaining income, c1 is consumed when an accident occurs, and c2 is considered consumed when an accident does not occur.

A. What risk preferences does this consumer have? If m = 100 and α = 0.2, what is the expected income and expected utility of the consumer? And what is the maximum expected income that consumers want to give up to avoid all risks?

B. Let's assume that the insurance company only secures zero profits through insurance sales. What is the consumer's available bundle before and after insurance coverage? Does insurance increase the available bundle? Explain this using a graph. If m = 100 and α = 0.2, what is the premium p paid by the consumer? Explain this using a graph.

Answer rating: 100% (QA)

A The consumer has a concave utility function indicating that they are riskaverse If m 100 and 02 th... View the full answer