Contingent Consumption and Insurance Budgets

Consumption with a state label

Fair odds

Unfair odds and no insurance

The state-price logic

Wealth 1000, loss of 400 with probability one quarter. What is the contingent consumption endowment?

At fair odds with loss probability one quarter, what is the budget slope and its meaning?

Buying full coverage K of 400 at the fair premium rate 0.25, what bundle results?

An insurer charges 0.35 per dollar of coverage instead of the fair 0.25. What happens to the budget and to full coverage?

With loss 400 at probability 0.25, compute the actuarially fair premium for full coverage, and write the number.

Same full coverage, compute the net addition to bad-state consumption, and write the number.

At a premium rate gamma of 0.35, what is the slope of the contingent budget line?

Buying full coverage K of 400 at gamma 0.35, which bundle results?

At fair odds, full coverage converts the 1000-or-600 gamble into a certain 900. What is 900?

Finance calls a dollar delivered only in the bad state an Arrow security. How does insurance relate to it?

At gamma of 0.35, compute the magnitude of the budget slope, one minus gamma over gamma, rounded to two decimals, and write the number.

At gamma of 0.35 with full coverage, the good state lands at 860. Compute the bad state's consumption, and write the number.