ECON 131A University of California Economics of Risk and Uncertainty Questions

Question Description

I have three questions and also have some of the answers. Please help me to check the answers and finish the rest of the question. For example, one of the questions is:

Jack Strong has $50,000 of wealth. He is participating in a Jujitsu competition. The prize is $10,000. He is guaranteed to win it (he has black belt) unless he breaks his arm. If his arm is broken, he will lose the tournament and he will have to pay $5,000 in medical expenses. Jack thinks that the probability of him breaking his arm during a tournament is 5 percent. He can get a medical insurance at a price of $.3 dollars for each $1 of coverage.

a) Write down his consumption if he does not purchase medical insurance.
b) Write down his consumption if he purchases medical insurance.
c) Derive the equation for Jack’s budget constraint.
d) Plot Jack’s budget constraint on the graph.
e) How much insurance will Jack buy?

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