Homework #9 Econ 612, Prof. Hanson

1.      For each of the following risks give a good reason why you might not want to buy insurance regarding that risk (1pt each): having a bad hair day, failing out of college, losing all interest in life, who is the next president, divorce.

2.      Make up a plausible signaling story to explain each of the following behaviors.

a.       a.      (2pt)  In the 1800s, a custom evolved of a man giving an expensive engagement ring to someone who had agreed to marry him.

b.      b.      (2pt) Banks have traditionally been housed in larger more expensive buildings than they really need to do their business.

3.      Here is a table of the cost and value of insurance, for two different risk types. For a 50/50 mix of types, find all (pure strategy) insurance equilibria, i.e., consistent matches between levels chosen by each type and the price for each insurance levels.

 Risk Type Cost of ½ insure Value of ½ insure Cost of full insure Value of full insure 1 40 50 80 100 2 20 27 40 54

4.      For each table of employee value and school cost, assume a 50/50 mix of types, and find all (pure strategy) signaling equilibria, i.e., consistent matches between school levels chosen by each type and employer expectations about those choices.

a.        (2pt)

 Type Value to Employers Cost of School 1 20 5 2 10 7

b.      (3pt)

 Type Value to Employers Cost of School 1 Cost of School 2 1 30 4 8 2 20 8 12