Without needing to know anything more about Juneís at-titude toward risk (except that she is strictly risk averse), explain whyif June believes the insurance is actuarially unfair, that is q is strictlygreater than her subjective probability that the truck will crash, thenJune will not fully insure, that is, she will choose C < L. Illustrateyour your answer by drawing appropriate indi§erence curves for Juneon your diagram from part (d)

Given Material: June is relocating from Canberra to Sydney and has engaged a removalist company to bring her household goods by truck from her house in Canberra to her new residence in Sydney. Suppose she faces the following uncertainty, either the truck makes the journey from Canberra to Sydney without incident and unloads her household goods in Sydney with nothing lost and nothing damaged, or, the truck crashes and all her household goods are damaged beyond repair. Let M denote her overall (money) wealth in the event that nothing is lost and ML denote her wealth in the event the truck carrying her household goods crashes. Assume M > L > 0.

Without needing to know anything more about June's attitude toward risk (except that she is strictly risk averse), explain why if June believes the insurance is actuarially unfair, that is q is strictly greater than her subjective probability that the truck will crash, then June will not fully insure, that is, she will choose C < L. Illustrate your answer by drawing appropriate indifference curves for June on your diagram from part (d).

Response: According to the given material, June is relocating from Canberra to Sydney and has engaged a removalist company to transport her household goods. She faces the uncertainty of either the truck making the journey without incident or the truck crashing and all her household goods being damaged beyond repair. Let M denote her overall wealth in the event that nothing is lost and ML denote her wealth in the event the truck carrying her household goods crashes. It is also mentioned that June is strictly risk-averse.

If June believes the insurance is actuarially unfair, that is q is strictly greater than her subjective probability that the truck will crash, then she will not fully insure, that is, she will choose C < L. This is because the cost of insurance (q) is higher than the expected loss from the truck crashing. In other words, the insurance premium is more than the expected payout in the event of a loss. Therefore, June will choose to self-insure to some extent by choosing a coverage level C that is less than the total value of her goods L.

To illustrate this, we can draw a diagram with the horizontal axis measuring the quantity x1 and the vertical axis measuring the quantity x2. We can plot June's state-contingent wealth if she does not take out any insurance. We can then draw indifference curves for June, which represent the combinations of wealth in the two states that she considers equally desirable. If June believes the insurance is actuarially unfair, then she will choose a policy that covers less than the maximum amount of loss, which is L. This means that her state-contingent wealth will be M - qC in the event the truck does not crash and M - qC + C in the event the truck crashes. We can then draw the indifference curves for June with partial insurance, which will be higher than the indifference curves without insurance, indicating that she is better off with partial insurance.

I hope this explanation helps. Let me know if you have any further questions.