(See Problem 2

question 1

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) 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.
• 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) no insurance since the cost per dollar of insurance exceeds the probability of a flood.
• 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:

Atlantic Slave Trade

The transatlantic trading of African slaves by European traders, mainly to the Americas from the 16th to 19th centuries, part of the global slave trade.

Rhode Island

The smallest U.S. state by area, located in the New England region, known for its sandy shores and maritime history.

Whale Oil

An oil obtained from the blubber of whales that was used historically as fuel for lamps, in soapmaking, and as a lubricant.

Port Cities

Coastal towns or cities with harbors where ships dock to load and unload goods and passengers, often centers of trade and cultural exchange.