Solved: What is optimal bundle of contingent claims, Microeconomics

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What is optimal bundle of contingent claims

Discussion:

A risk averse person with a von-Neumann-Morgenstern utility index of: U = ln(Y) has a 20% chance that a disaster will reduce her regular income of $100,000 to zero. She can buy insurance at a rate of $0.40 per dollar of coverage.

a)Will she fully, under, or over-insure against this risk, and why?

b) What is her optimal bundle of contingent claims?

c) How much insurance will she buy and at what cost?

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