Question: Lucy, from Problem 4, spends all her income on lemonade, which costs $1 per pint. She earns $300 per month, but is robbed with 25

Lucy, from Problem 4, spends all her income on lemonade, which costs $1 per pint. She earns $300 per month, but is robbed with 25 percent probability, in which case she is left with only $100. She can buy theft insurance to protect herself against that potential loss. The insurance costs 30 cents for each dollar of promised benefits. We can represent Lucy's preferences with an expected utility function, with the benefit function W(L) = La /a.Lucy's utility function is then

a. What is Lucy's budget line? Assume that LN is plotted along the horizontal axis and LR is plotted along the vertical axis.
b. How much insurance does Lucy buy?
c. When a = - 0.2, how much insurance will Lucy buy?
d. When a = 0.2, how much insurance will Lucy buy?
e. When a = 0.6, how much insurance will Lucy buy?

V(LN, LR)= + 4a R 4a

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