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Question: question 1 20 marks a a consumer maximizes utility and...

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Question 1 (20 marks) (a) A consumer maximizes utility and has Bernoulli utility function u(w)/2. The consumer has initial wealth w 1000 and faces two potential losses. With probability 0.1, the consumer loses S100, and with probability 0.2, the consumer loses $50. Assume that both losses cannot occur at the same time. What is the most this consumer would be willing to pay for full insurance against these losses? (10 marks) (b) A consumer has utility function u(z, y) In(x) + In(3). The price of goods and y are 2 and py -1. The consumer has initial wealth w i) Write down the consumers utility maximization problem. (3 marks) ii) If the consumer maximizes utility, how many units of goods and y will she choose pa 20. to consume? (7 marks

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