New York University BUSF-SHU BUSF-SHU 304 O 2. (30 points; substantially modified from number 14 on Problem…

New York University BUSF-SHU BUSF-SHU 304 O 2. (30 points; substantially modified from number 14 on Problem…

A rich uncle gives you a gift certificate that entitles you to an insurance contract, of your own choosing, with an actuarial value (an expected return) of $1 million.  The only uncertainty you face us about whether you will be involved in an accident that leaves you paralyzed; this will happen with probability ½.  You may allocate the $1 million in actuarial value however you wish between the two states, paralyzed and not paralyzed.  It has been observed that, when faced with this choice, some people choose to receive more money in the paralyzed state, some choose to receive less money in the paralyzed state, and some choose to receive equal amounts in both states.
(a) Which of these choices is/are consistent with expected-utility maximization with a strictly concave, differentiable, state-independent von Neumann—Morgenstern utility function?  Explain.

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