New York University BUSF-SHU BUSF-SHU 304 O 2. (30 points; substantially modified from number 14 on Problem…
. An expected utility-maximizing person has von Neumann—Morgenstern utility function u(·), with u'(·) > 0, and deterministic initial wealth w. He is just indifferent between losing x > 0 for certain, and losing y > x with probability p > 0 and losing nothing with probability 1 – p. (In other words, x is the most he will pay to be insured against a random loss of y with probability p.)
(a) Prove that for any given values of w and y, x is an increasing function of p.
(b) Prove that for any given values of w and p, x is an increasing function of y.
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