1. If June views the insurance as actuarially fair, this means that the premium she pays for the insurance (q) equals her subjective probability that the truck will crash. In other words, the expected cost of the insurance equals the expected benefit.

2. Given that June is strictly risk averse, she dislikes uncertainty and prefers to have a guaranteed level of wealth rather than face a gamble with the same expected value but some risk of getting less. Therefore, if the insurance is actuarially fair, she will choose to fully insure (C = L) to eliminate the risk of the truck crashing.

3. This is because with full insurance, her wealth will be the same in both states (W - qL), regardless of whether the truck crashes or not. This certainty is more valuable to her than the possibility of having more wealth in one state but less in the other.

4. On the diagram from part (d), this would be represented by a point on the 45-degree line, which represents equal wealth in both states. The line representing the insurance policies would intersect the 45-degree line at this point.

5. June's indifference curves would be strictly convex to the origin, reflecting her risk aversion. The indifference curve that passes through the point of full insurance would be tangent to the 45-degree line at that point, indicating that this is the highest level of utility she can achieve given the cost of the insurance.

6. Any other point on the line representing the insurance policies would be on a lower indifference curve, indicating a lower level of utility. This is because these points involve some risk of the truck crashing without full insurance coverage, which June dislikes due to her risk aversion.

7. Therefore, if the insurance is actuarially fair, June will fully insure to maximize her utility, given her strict risk aversion.

Question

1. If June views the insurance as actuarially fair, this means that the premium she pays for the insurance (q) equals her subjective probability that the truck will crash. In other words, the expected cost of the insurance equals the expected benefit.

2. Given that June is strictly risk averse, she dislikes uncertainty and prefers to have a guaranteed level of wealth rather than face a gamble with the same expected value but some risk of getting less. Therefore, if the insurance is actuarially fair, she will choose to fully insure (C = L) to eliminate the risk of the truck crashing.

3. This is because with full insurance, her wealth will be the same in both states (W - qL), regardless of whether the truck crashes or not. This certainty is more valuable to her than the possibility of having more wealth in one state but less in the other.

4. On the diagram from part (d), this would be represented by a point on the 45-degree line, which represents equal wealth in both states. The line representing the insurance policies would intersect the 45-degree line at this point.

5. June's indifference curves would be strictly convex to the origin, reflecting her risk aversion. The indifference curve that passes through the point of full insurance would be tangent to the 45-degree line at that point, indicating that this is the highest level of utility she can achieve given the cost of the insurance.

6. Any other point on the line representing the insurance policies would be on a lower indifference curve, indicating a lower level of utility. This is because these points involve some risk of the truck crashing without full insurance coverage, which June dislikes due to her risk aversion.

7. Therefore, if the insurance is actuarially fair, June will fully insure to maximize her utility, given her strict risk aversion.

Knowee AI · Accepted Answer

1. If June views the insurance as actuarially fair, this means that the premium she pays for the insurance (q) equals her subjective probability that the truck will crash. In other words, the expected cost of the insurance equals the expected benefit.

2. Given that June is strictly risk averse, she dislikes uncertainty and prefers to have a guaranteed level of wealth rather than face a gamble with the same expected value but some risk of getting less. Therefore, if the insurance is actuarially fair, she will choose to fully insure (C = L) to eliminate the risk of the truck crashing.

3. This is because with full insurance, her wealth will be the same in both states (W - qL), regardless of whether the truck crashes or not. This certainty is more valuable to her than the possibility of having more wealth in one state but less in the other.

4. On the diagram from part (d), this would be represented by a point on the 45-degree line, which represents equal wealth in both states. The line representing the insurance policies would intersect the 45-degree line at this point.

5. June's indifference curves would be strictly convex to the origin, reflecting her risk aversion. The indifference curve that passes through the point of full insurance would be tangent to the 45-degree line at that point, indicating that this is the highest level of utility she can achieve given the cost of the insurance.

6. Any other point on the line representing the insurance policies would be on a lower indifference curve, indicating a lower level of utility. This is because these points involve some risk of the truck crashing without full insurance coverage, which June dislikes due to her risk aversion.

7. Therefore, if the insurance is actuarially fair, June will fully insure to maximize her utility, given her strict risk aversion.

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