Which of the following is true about a risk-averse individual facing a full menu of actuarily fair insurance contracts to choose from?
A)The individual will "over-insure" if consumption is more meaningful in the good state.
B)The individual will "over-insure" if consumption is more meaningful in the bad state.
C)The individual will fully insure when tastes are state-independent.
D)(a) and (b) are true.
E)(a) and (c) are true.
F)(b) and (c) are true.
G)All of the above.
H)None of the above.

Question

Quizplus · Accepted Answer

A risk-averse individual prefers to avoid uncertainty, leading them to fully insure when their tastes do not depend on the state of the world, which is consistent with choice (C). They are also more likely to "over-insure" if they value consumption more in the bad state, as insurance provides a safety net that is more valuable when the bad state is particularly undesirable, aligning with choice (B).

Which of the Following Is True About a Risk-Averse Individual