Ashton has the utility of wealth curve shown in the above figure. Ashton owns a sports car worth 30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year.
If he does have an accident, his car is worthless. Suppose all sports cars owners are like Ashton. An insurance company agrees to pay each person who has an accident the full value of their car. The company's operating expenses are 1,000. What is the minimum insurance premium that the company is willing to accept? A) 3,000 per year
B) 6,000 per year
C) 10,000 per year
D) 15,000 per year
Question 2
Russia, Iran and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel for natural gas. Each of the countries can comply with the cartel agreement or to cheat on the cartel agreement.
If all countries comply, the economic profit for each will be 140 million. If one country cheats, that country earns 200 million in economic profit and the other countries will have economic losses of 10 million. If all countries cheat, they break even. What are the strategies in this game? A) Comply with the cartel agreement or to cheat on the cartel agreement.
B) Comply with the agreement and earn 140 million in profit.
C) Cheat on the cartel agreement and earn -10 million in profits.
D) Earn between 140 and 200 million in profits.
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