There are many entrepreneurs in El Alto who are starting their own businesses. However, starting a new business is risky, and they are hoping for...

Please explain wherever you can. Would really appreciate the help!

There are many entrepreneurs in El Alto who are starting their own businesses. However, startinga new business is risky, and they are hoping for insurance to smooth their income in the chancethat their project does not succeed. To keep things tractable, let’s assume that you are risk-neutral(so all you care about is maximizing profits) and the entrepreneurs have utility u(c) = ln(c). 1) 2) 3) 4) 5) For this part, assume that an entrepreneur walks into your office with a great idea for asilpancho restaurant, which has a probability p of succeeding (as you know, silpancho is thethird-best kind of Bolivan food). If her restaurant succeeds, she will earn 54,000 pesos,otherwise she will earn 25,000 pesos. Suppose you offer an insurance product with thefollowing characteristic: for every peso she pays you in the good state, you pay her (3 pesos inthe bad state (note that this is slightly different than the set-up in class). If she buys y units ofthis insurance, what is her expected utility? p1— Show that the insurance is actuarially fair if q = —p You decide to charge amarkup at. That is to say, q = L 1. Derive how many units of insurance l—p 11:will be purchased as a function of p and 1:. Using your favorite software package, create a well-labeled graphs showing the relationshipbetween insurance purchases and 7:. In one graph, hold at fixed (at 1.5), and put p on the x-axisand y on the y-axis. In the second graph, hold p fixed (at 2:5) and put at on the x-axis and y onthe y-axis. Remember that the contract is that they pay you in the good state: you are not willingto sell negative units of insurance. In the third graph, still holding p fixed (at ZIS) and put at onthe x-axis and y on the y—axis. Explain the intuition for your results For p=2fS, what is your profit maximizing price and what are your profits? What about for p= NZ?