1. Jack Strong has $50,000 of wealth. He is participating in a Jujitsu competition. The prize is $10,000. He is guaranteed to win it (he had black belt) unless he breaks his arm. If his arm is broken, he will lose the tournament and he will have to pay $5,000 in medical expenses. Jack thinks that the probability of him breaking his arm during a tournament is 5 percent. He can get a medical insurance at a price of $.3 dollars for each $1 of coverage.

a) Write down his consumption if he does not purchase medical insurance.

b) Write down his consumption if he purchases medical insurance.

c) Derive the equation for Jack’s budget constraint.

d) Plot Jack’s budget constraint on the graph.

e) How much insurance will Jack buy?

Answer rating: 100% (QA)

Jven hearth5000 Yony 1g nis arm is boken che will dose the l... View the full answer