Redo the problem in Question 2 under the assumption that the person has utilityfunction u(c) = ln(c) (instead of u(c) = √C). The other parameters are the same asthose used in Question 2. How the solution found in Question 2 will change?Q2:A person has wealth of $500,000. In case of a flood her wealth will be reduced to$50,000. The probability of flooding is 1/10. The person can buy flood insurance at acost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derivesfrom c dollars of wealth (or consumption) is given by u(c) = √c. Let CF denote thecontingent commodity dollars if there is a flood (horizontal axis) and CNF denote thecontingent commodity dollars if there is no flood (vertical axis).(a) Determine the contingent consumption plan if she does not buy insurance.(b) Determine the contingent consumption plan if she buys insurance $K.(c) Use your answer in (b) to eliminate K and construct the budget constraint (BC)that gives the feasible contingent consumption plans for different amounts ofinsurance K. Determine the slope of budget line (both graphically and by formingthe price ratio).

Contingent consumption refers to the consumption of the buyer when there are uncertain conditions.…

Redo the problem in Question 2 under the assumption that the person has utility function u(c) = In (c) (instead of u(c) = √c). The other parameters are the same as those used in Question 2. How the solution found in Question 2 will change? Q2: A person has wealth of $500,000. In case of a flood her wealth will be reduced to $50,000. The probability of flooding is 1/10. The person can buy flood insurance at a cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives from c dollars of wealth (or consumption) is given by u(c) = √c. Let C‡ denote the contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the contingent commodity dollars if there is no flood (vertical axis). (a) Determine the contingent consumption plan if she does not buy insurance. (b) Determine the contingent consumption plan if she buys insurance $K. (c) Use your answer in (b) to eliminate K and construct the budget constraint (BC) that gives the feasible contingent consumption plans for different amounts of insurance K. Determine the slope of budget line (both graphically and by forming the price ratio).

Redo the problem in Question 2 under the assumption that the person has utility function u(c) = In (c) (instead of u(c) = √c). The other parameters are the same as those used in Question 2. How the solution found in Question 2 will change? Q2: A person has wealth of $500,000. In case of a flood her wealth will be reduced to $50,000. The probability of flooding is 1/10. The person can buy flood insurance at a cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives from c dollars of wealth (or consumption) is given by u(c) = √c. Let C‡ denote the contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the contingent commodity dollars if there is no flood (vertical axis). (a) Determine the contingent consumption plan if she does not buy insurance. (b) Determine the contingent consumption plan if she buys insurance $K. (c) Use your answer in (b) to eliminate K and construct the budget constraint (BC) that gives the feasible contingent consumption plans for different amounts of insurance K. Determine the slope of budget line (both graphically and by forming the price ratio).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.1P

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