Consider a market of risk averse decision makers, each with a utility function U=√I Each decision maker has an income of $90,000
, but faces the possibility of a catastrophic loss of $50,000 in income. Each decision maker can purchase an insurance policy that fully compensates her for her loss. This insurance policy has a cost of $5,900. Suppose each decision maker potentially has a different probability p of experiencing the loss.a. What is the smallest value of p so that a decision maker purchases insurance? Show your work.b. What would happen to this smallest value of p if the insurance company were to raise the insurance premium from $5,900 to $27,500?
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