Econ 171 Problem Set 6: Prospect Theory part 2 Spring 2015

       1. Consider Annes decision whether or not to buy insurance. Specifically she can

          purchase a policy that costs 100 per month and provides full coverage in the

          event of an accident. The probability of an accident in a given month is . If

          there is an accident and Anne is uninsured it will cost her 5000.

              a. Suppose Anne simply maximizes her expected payout. Will she choose to

                 buy insurance?

              b. Suppose Anne maximizes expected utility. Describe the condition under

                 which shell purchase insurance.

              c. Suppose Anne maximizes the...