b) Each individual has an expected utility function that looks like the following: EU pin()+(1) where...

 

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b) Each individual has an expected utility function that looks like the following: EU pin()+(1) where p is the probability of an accident, P is an individual's net income in case of an accident. and is an individual's net income if no accident occurs. Assume that W is equal to 100 and is equal to 50. If a person of type B is offered an actuarially fair insurance contract, derive the amount of insurance this person would choose to buy. Interpret your result. (Hint: Find the optimal amount of insurance by choosing either a or i to maximize a type B person's expected utility subject to the appropriate no profit insurance constraint.] c) Would a type A person prefer full insurance at actuarial fair rates appropriate to their own risk or the insurance contract chosen by type B individuals in part by? [Do not work this our algebraically. Derive your answer using a graph with net income in the accident state on one axis and net income in the no-accident state on the other.] Would an insurance company be willing to offer full insurance at rates appropriate to type B's risk if it could not tell type A and type B individuals apart? d) Explain how the government can help to improve problems of adverse selection like the one encountered in part c). b) Each individual has an expected utility function that looks like the following: EU pin()+(1) where p is the probability of an accident, P is an individual's net income in case of an accident. and is an individual's net income if no accident occurs. Assume that W is equal to 100 and is equal to 50. If a person of type B is offered an actuarially fair insurance contract, derive the amount of insurance this person would choose to buy. Interpret your result. (Hint: Find the optimal amount of insurance by choosing either a or i to maximize a type B person's expected utility subject to the appropriate no profit insurance constraint.] c) Would a type A person prefer full insurance at actuarial fair rates appropriate to their own risk or the insurance contract chosen by type B individuals in part by? [Do not work this our algebraically. Derive your answer using a graph with net income in the accident state on one axis and net income in the no-accident state on the other.] Would an insurance company be willing to offer full insurance at rates appropriate to type B's risk if it could not tell type A and type B individuals apart? d) Explain how the government can help to improve problems of adverse selection like the one encountered in part c).

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b To find the optimal amount of insurance x that a type B person would choose to buy we need to maximize their expected utility subject to the noprofi... View the full answer