Lynne’s income is $2, 000 and she is risk averse. The probability of someone slipping
on her stairs is 1
8 . If this happens, she will be sued for $1, 000 and will have to pay that
amount. She can purchase insurance at a price of $0.30 per dollar of coverage. Show how
the equilibrium amount of insurance coverage is determined. Show how it changes if the
probability of someone slipping increases to 1
4 , but the premium is unchanged.