Consider insurance that is actuarially fair, meaning that the premium is equal to expected claims: Premium = p A where p is the expected probability of a claim, and A is the amount that the insurance company with pay in the event of an accident. An agent has a level of wealth w 0 p = 0.3 the agent will suffer a loss with the amount, L = 4000. How much insurance will a risk averse agent buy? (A =?) = 10000. There is a probability of

Consider insurance that is actuarially fair, meaning that the premium is equal to expected claims: Premium = p A where p is the expected probability of a claim, and A is the amount that the insurance company with pay in the event of an accident. An agent has a level of wealth w 0 p = 0.3 the agent will suffer a loss with the amount, L = 4000. How much insurance will a risk averse agent buy? (A =?) = 10000. There is a probability of

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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Suppose Grace and Lisa are to go to dinner. Lisa is visiting Grace from outof town, and they are to meet at a local restaurant. When Lisa lived in town,they had two favorite restaurants: Bel Loc Diner and the Corner Stable. Ofcourse, Lisa’s information is out of date, but Grace knows which is betterthese days. Assume that the probability that the Bel Loc Diner is better isp > 1/2 and the probability that the Corner Stable is better is 1 - p. Naturedetermines which restaurant Grace thinks is better. Grace then sends amessage to Lisa, either “Let’s go to the Bel Loc Diner,” “Let’s go to theCorner Stable,” or “I don’t know [which is better].” Lisa receives the message, and then Grace and Lisa simultaneously decide which restaurant to go to. Payoffs are such that Grace and Lisa want to go to the same restaurant, but they prefer it to be the one that Grace thinks is better. More specifically, if, in fact, the Bel Loc Diner is better, then the payoffs from theiractions are as shown in the…
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