A risk Averse Individual Faces - Management Assignment Help

Assignment Task:

Task:

Question 1 A risk averse individual faces uncertainty with two outcomes: good, bad. The individual has income $560 under good and $350 under bad outcome. The probability of good outcome is 4/7 (so the probability of bad outcome is 1 − 4/7 = 3/7). The individual can buy any non-negative x units of insurance. Every unit of insurance has price $p and it pays $1 in the event of bad outcome. In this insurance market, the unit price of insurance is known to be p = 1/2.
(a) [2 points] Determine if the insurance market is competitive or not.
(b) [6 points] Suppose the individual buys x units of insurance. Determine the individual's net income under good income, net income under bad income and the average net income. Draw these three in a diagram as functions of x.
(c) [6 points] For the individual: (i) compare full insurance with over insurance and (ii) compare full insurance with partial insurance. Then determine best choice of insurance for the individual.
(d) [6 points] Consider the same problem, but suppose the individual is risk neutral instead of risk averse. Determine best choice of insurance for the individual.

Question 2 Consider three choices A, B, C. Choice A gives $40 with probability 1/4 and $80 with probability 3/4. Choice B gives $70 with certainty. Choice C gives $56 with probability 1/4 and $80 with probability 3/4.
(a) [2 points] Determine if a risk averse individual (i) prefers A over B, or (ii) prefers B over A, or (iii) more information on the individual's risk attitude is needed to compare A,B for the individual.
(b) [2 points] Determine if a risk averse individual (i) prefers A over C, or (ii) prefers C over A, or (iii) more information on the individual's risk attitude is needed to compare A,C for the individual.
(c) [2 points] Determine if a risk averse individual (i) prefers B over C, or (ii) prefers C over B, or (iii) more information on the individual's risk attitude is needed to compare B,C for the individual.
(d) [2 points] Determine if a risk neutral individual (i) prefers A over B, or (ii) prefers B over A, or (iii) more information on the individual's risk attitude is needed to compare A,B for the individual.
(e) [2 points] Determine if a risk neutral individual (i) prefers A over C, or (ii) prefers C over A, or (iii) more information on the individual's risk attitude is needed to compare A,C for the individual.
(f) [2 points] Determine if a risk neutral individual (i) prefers B over C, or (ii) prefers C over B, or (iii) more information on the individual's risk attitude is needed to compare B,C for the individual.

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