Gaston Gourmand loves good food.Due to an unusual ailment, he has a probability of 1/4 of losing his sense of smell, which would greatly reduce his enjoyment of food.Gaston finds an insurance company that will sell him insurance where Gaston gets $3x if he loses his smell and pays $x if he doesn't.He can also buy negative insurance, where Gaston pays $3x if he loses his sense of smell and gets $x if he doesn't.Gaston says, "Money will be only half as important to me if I lose my sense of smell." If we look at his expected utility function, we see what he means.Where c₁ is his consumption if he retains his sense of smell and c₂ is his income if he loses his sense of smell, Gaston has the expected utility function U(c₁, c₂)= 3/4 c^1/2₁ + 1/8 c^1/2₂.What insurance should he buy?

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The Answer of Gaston Gourmand loves good food.Due to an unusual ailment, he has a probability of 1/4 of losing his sense of smell, which would greatly reduce his enjoyment of food.Gaston finds an insurance company that will sell him insurance where Gaston gets $3x if he loses his smell and pays $x if he doesn't.He can also buy negative insurance, where Gaston pays $3x if he loses his sense of smell and gets $x if he doesn't.Gaston says, "Money will be only half as important to me if I lose my sense of smell." If we look at his expected utility function, we see what he means.Where c₁ is his consumption if he retains his sense of smell and c₂ is his income if he loses his sense of smell, Gaston has the expected utility function U(c₁, c₂)= 3/4 c^1/2₁ + 1/8 c^1/2₂.What insurance should he buy?

Gaston Gourmand Loves Good Food