Contingent commodity framework, Microeconomics

1) Lynne's income is £2, 000 and she is risk averse. The probability of someone slipping on her stairs is 1/8. If this happens, she will be sued for £1, 000 and will have to pay that amount. She can purchase insurance at a price of £0.30 per pound of coverage.

a) Use the contingent commodity framework with consumption if not sued on the horizontal axis and consumption if sued on the vertical axis and illustrate lynnes situation before an accident happens

b) Show in your graph how the equilibrium amount of insurance coverage is determined

c) Show how it changes if the probability of someone slipping increases to 1/4, but the premium is unchanged.

Posted Date: 2/25/2013 2:01:35 AM | Location : United States

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