Consider Ann and Bob and assume that Ann has a felicity function with respect to consumption...

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Consider "Ann" and "Bob" and assume that "Ann" has a felicity function with respect to consumption given by UA (c) = c. Bob has a felicity function given by UB (c) = √c. Assume that Ann receives $100,000 with certainty. Bob has uncertain prospects. With probability p=0.5 he will earn $40,000 and with probability p=0.5 he will earn $90,000. a.) What is the expected utility of both of these agents? b.) Assume that Ann could offer an insurance contract to Bob. Bob will accept this contract as long as it makes him at least as well off as if he faces the risk. Describe the contract that Ann would offer Bob and how much her expected utility would be given this contract. c.) Now assume that there are many other people like Ann out there who will compete with each other (i.e.: there is a perfectly competitive market for insurance). Bob will take the contract that is best for him. What contract would be offered to Bob in equilibrium? What would be his expected utility. d.) Are the allocations in b and c Pareto efficient? Explain in less than 50 words. Consider "Ann" and "Bob" and assume that "Ann" has a felicity function with respect to consumption given by UA (c) = c. Bob has a felicity function given by UB (c) = √c. Assume that Ann receives $100,000 with certainty. Bob has uncertain prospects. With probability p=0.5 he will earn $40,000 and with probability p=0.5 he will earn $90,000. a.) What is the expected utility of both of these agents? b.) Assume that Ann could offer an insurance contract to Bob. Bob will accept this contract as long as it makes him at least as well off as if he faces the risk. Describe the contract that Ann would offer Bob and how much her expected utility would be given this contract. c.) Now assume that there are many other people like Ann out there who will compete with each other (i.e.: there is a perfectly competitive market for insurance). Bob will take the contract that is best for him. What contract would be offered to Bob in equilibrium? What would be his expected utility. d.) Are the allocations in b and c Pareto efficient? Explain in less than 50 words.

Answer rating: 100% (QA)

A Anns expected utility is UA100000 100000 and Bobs expected utility is UB0540000 0590000 0540000 90... View the full answer