Q1. Suppose there is a 50-50 chance that a risk adverse individual with a current wealth of $20000 will contract a debilitating disease and suffer a loss of $10000. Calculate the cost of actuarially fair insurance in this situation and draw a utility income graph to show that the individual will prefer fair insurance against this loss to accepting the gamble insured.
Q2. Suppose that the average household in a state consume 800 gallon of gasoline per year. a 20-cent gasoline tax in introduced, coupled with $160 annual tax rebate per household. Will the household be better or worse off under the new program?