Economic Essay Example | Topics and Well Written Essays - 500 words - 2

Economic - Essay Example Risk averse individuals are better off with purchase of insurance because they prefer certain losses to uncertain ones of the same scale. Given that the marginal utility of wealth is diminishing they are ready to give up certain and reasonable amount of money in the form of insurance premium to avoid chance of large and uncertain loss. Thus, it is in their interest to buy insurance because of certainty it provides. According to the expected utility model the individuals tend to undertake actions that increase the expected utility value (U), which can be expressed as the function of the income (Y). If the probability of the accident resulting in the loss of X is indicated as P and assuming that insurance company in the case of accident will pay the amount equal to X, the expected utility for an individual who does not buy insurance is equal to: If per unit tax on a good is imposed and the tax revenue is then used to offset the decrease in consumer surplus the consumers still would be worse of than before introduction of the tax. It happens because the consumer bears an excessive burden which is equal to the difference between the value of equivalent variation (compensation that allows the customer to achieve the same level of utility as before tax, graphically – vertical distance between pre- and post-tax indifference curves) and tax revenue that the government can use in order to offset the effect of tax (graphically - vertical distance between corresponding budget constraint lines). It may be beneficial for the companies offering service or good A to introduce a choice of price and service options in order to target the groups of customers with different levels of income and needs. The optimal bundle of the service A and all the other goods will vary depending on the budget constraint and marginal utility of A for a certain group. Introducing number of variations A1, A2,†¦., An (from low price – low service to higher priced