Econ 171 Problem Set 6 Solutions 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?

             E(payoutpurchase insurance)   100

             E(payoutno insurance)  ( 5000)   50

             She wont buy the insurance because her expected payout is higher if she

            ...