Question
Do you agree with the proposition that a risk-averse person will optimally buy full insurance if the insurance is actuarially fair? Give reasons in support of your answer.
Answer :
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Yes a risk-averse person will optimally buy full insurance if the insurance is actually fair as the expected utility of such consumer rises with the purchase of insurance although expected wealth is unchanged. Since insurance increases the consumer’s welfare, she is willing to pay some positive price in excess of the actuarially fair premium to defray risk. Thus, the agent is trying to equate the marginal utility of wealth across states.
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