ohh and I forgot to add:
José lives in a village with many identical farmers. Specifically, they all have the same utility function and income levels and probabilities under farming. All risk in the village is idiosyncratic risk.
--extra info for part D!
Joe:
y= 100 (High) prob = 2/5
=25 (medium) prob= 2/5
=0 (low) prob = 1/5
Calculate:
1. José’s risk premium, p, associated with farming and
2. José’s certainty equivalent associated with farming.
The village decides to implement an informal insurance (risk sharing) arrangement. For this part assume there is no asymmetric information or enforcement problems. Let tH, tM, and tL denote the transfer made by a farmer into the village insurance fund under the High, Medium, and Low outcomes (a negative t means the farmer receives a payment). Find the values of tH, tM, and tM in an ideal (first best) insurance arrangement (remember an ideal risk sharing arrangement will achieve the most possible consumption smoothing).
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