Maurice Tutor

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Category > Economics Posted 13 May 2018 My Price 6.00

left-handed people

Suppose that left-handed people are more prone to injury than right-handed people. Lefties have an 80 percent chance of suffering an injury leading to a $1,000 loss (in terms of medical expenses and the monetary equivalent of pain and suffering) but righties have only a 20 percent chance of suffering such an injury. The population contains equal numbers of lefties and righties. Individuals all have logarithmic utility-of-wealth functions and initial wealth of $10,000. Insurance is provided by a monopoly company.

a. Compute the first best for the monopoly insurer (i.e., supposing it can observe the individual’s dominant hand).

b. Take as given that, in the second best, the monopolist prefers not to serve righties at all and targets only lefties.  nowing this, compute the second-best menu of policies for the monopoly insurer.

c. Use a spreadsheet program  or other mathematical software to solve numerically the constrained optimization problem for the second best. Make sure to add constraints bounding the insurance payments for righties: 0 ≤xR≤1,000: Establish that the constraint 0 ≤xRis binding and so righties are not served in the second best.

 

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Maurice Tutor
(5)
Status NEW Posted 13 May 2018 02:05 PM My Price 6.00

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