(See Problem 2

question 16

Multiple Choice

(See Problem 2.) Willy's only source of wealth is his chocolate factory. He has the utility function , where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of Willy's factory is $500,000 if there is no flood and 0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $ whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy

• A) no insurance since the cost per dollar of insurance exceeds the probability of a flood.
• B) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there is no flood.
• C) enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
• D) .enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there is no flood.
• E) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there is no flood

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Definitions:

Trading Possibilities Line

A graphical representation showing the combinations of goods that a country can produce or trade given the resource constraints and technology.

International Trade

The exchange of goods and services between countries.

Domestic Production

It refers to the total value of all goods and services produced within a country's borders in a specific time period.

Domestic Export Sector

The part of a country's economy that is focused on producing goods and services for exportation to other countries.