Brac University

ECO208, Intermediate Microeconomics II,

Time: 1 hours 10 minutes, Full Marks: 20
Instructions:
1. All questions have equal weights, show all your work to get full marks.
2. Working Submission: It is crucial that you do all the necessary steps in your workings
with neat handwriting during the exam, as you will be required to submit a PDF file of
your workings in the same Google Form.
3. Also, save your PDF as Firstname_studentID, i.e. Tanvir_1111111

QUESTION 1:
Suppose there is a 50–50 chance that a risk-averse individual with a current wealth of
$50,000 will contract a debilitating disease and suffer a loss of $20,000.

a) Calculate the cost of actuarially fair insurance in this situation and use a
utility-of-wealth graph to show that the individual will prefer fair insurance against this
loss to accepting the gamble uninsured. (6)
b) Suppose two types of insurance policies were available:
(1) a fair policy covering the complete loss; and
(2) a fair policy covering only half of any loss incurred.

Determine the costs associated with both policies. Which of the policies would typically be
considered the inferior option? (4)

QUESTION 2:
Suppose, two Ranchers are deciding on the number of cattle to graze on a field. The field
can hold qi cows, where i represents the rancher. The value of each cow is given by-

( )
𝑉 𝑞1, 𝑞2 = 200 − ( )(𝑞
4
6 1 )
+ 𝑞2 .

(a) Determine the Nash equilibrium to the nearest cow, assuming each rancher is
maximizing their own payoff. (4)
(b) Illustrate the Nash equilibrium on a clearly labeled diagram. (2)
(c) If the ranchers aim to maximize the joint payoff of grazing their cattle, what is the
total number of cows that will achieve this goal? (3)
(d) Discuss the implications of the results obtained in (a) and (c) on the depletion of the
field. (1)