Hints for solving problem set #4 (spreadsheet hint)

An acceptable alternative way (either in lieu of or in addition to) for solving problem 2 in Problem Set #4 would be to build a spreadsheet model in which you use Solver to determine the optimal exposure to risk for both investors. If you decide to build your own spreadsheet model, upload it in addition to the problem set itself in order to get credit for working problem 2 this way.

An example of how to use Solver for figuring out an optimal decision is provided in my “Optimal insurance demand” spreadsheet. There, alpha corresponds to the percent of the risk to be insured and beta corresponds to the percentage markup from the actuarially fair price; when the beta is zero (as currently coded), then insurance is actuarially fair and Solver returns an alpha value of 1 (i.e., full coverage; as currently coded, this spreadsheet corroborates the Bernoulli principle for a consumer with a square root utility function.

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