Question

Ashley's preferences between candy consumption is given by Um(cg,Cb)=pln(cg) + (1-p)ln(Cb) where p =2/3, Cg=400, and Cb=75. Erik is infinitely risk adverse where Ua(Cg,Cb)= min (Cg,Cb) Erik faces the same probabilities. Each unit of consumption has a value of/cost of $1. If Ashley can purchase insurance at $.60 per $1 of coverage how much will she purchase and what will she pay? How much will Erik be willing to pay to get Ashley's full policy? What is the least amount Margot would be willing to accept from Erik for the full policy? Will Margot sell her policy?

Answer 1