Question

if the consumer’s U(c) = square root c, the probability of an adverse event is 0.25, and as the adverse event happens the consumer’s consumption is 9; when the adverse event does not occur the consumption is 24,

1. the consumer’s utility from the expected consumption is?
2. why is the consumer's utility from the expected consumption and the result of consumer’s expected utility different?
3. design an insurance product with a fair premium and indicate how it impacts the consumer's outcomes for the event.
4. Does this product provide full insurance? Would a consumer buy this insurance policy?
5. What is the risk premium?
6. What is the greatest premium that the insurance company could charge for the insurance product and the consumer would buy it?

Answer 1

Answer)

If you have any doubts please comment...