Mr Gengar purchases a new video game console with a value of $5,000. There is a probability of 10% the console will be damaged (and become worthless) within 2 years due to extensive hardcore usage. The game shop provides a warranty service (which costs $600) guarantee a cash refund of $5,000 for any damaged console within 2 years. 

The utility function of Gengar is: U(W) = W0.8

1. Where W denotes the wealth faces by Genfar. Should Gengar purchase this warranty service? Explain.
2. With the aid of a diagram, briefly explain why the indifference curves of a person cannot intercept.

Answer:

a) He should not purchase this warranty service.

b) Two indifference curve cannot intersect is proved below

Step-by-step explanation

a) Let us consider the scenario when Mr. Gengar does not purchase warranty. 

Then after two years his expected wealth = 4500 

and thus his level of utility is 

4500^0.8 = 836.7

Now let us consider the scenario when he purchase the warranty.

Cost incurred in purchasing the warranty is 600

and the value after 2 years will be guaranteed 500 whether it will get damaged or not.

so expected value after 2 year

= 5000- 600

= 4400

So his utility = 4400^0.8 

= 821.8

Thus his expected value and level of utility is higher if he doesn't buy the warranty.

Hence we have concluded that Mr. Gengar should not buy the warranty.

b) 

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https://helpinhomework.org/blog/how-to-obtain-answer-through-google-drive-link