Tweedledum and Tweedledee live along the Gulf Coast, where there is a risk of hu

Question

Tweedledum and Tweedledee live along the Gulf Coast, where there is a risk of hurricanes but insurance providing either full or partial coverage is available at its actuarially fair price. Tweedledum is risk averse, whereas Tweedledee is risk seeking. Will Tweedledum choose to buy full coverage, partial coverage, or no coverage at all? What about Tweedledee? Explain your answer, sketching an indifference curve/budget line diagram for each of these characters showing contingent claims for consumption if there is a hurricane and if no hurricane occurs. You may assume that their ability to enjoy consumption is not affected by whether or not a hurricane occurs.

Explanation / Answer

As Tweedledum is risk averse, he will go for full coverage of insurance

Tweedledee is risk seeking, he will go for either partial coverage or no coverage

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