0.5 Rosa has a 10% chance of getting sick in the next year. If she gets sick, her medical bills will amount to $500. She has a wealth of $1,000. Suppose she has the utility function u(x) = x where x is her net wealth at the end of the year. " a. Calculate AND interpret Rosa's risk premium. b. What is the most that Rosa is willing to pay for an insurance policy that fully covers against her loss? c. Some insurance policies have deductibles. A deductible is an amount of a claim not covered by insurance; it's a fixed portion of the medical bills that the insured person must pay in order to make a claim to their insurer. Suppose Rosa's insurance company provides two plans. Plan A has zero deductibles (good!) but charges a high premium (bad!). Specifically, Plan A charges $55 for $500 of coverage. Plan B has a deductible of $K, where K<500, but charges a premium of just $(55 - .1K). Suppose K =$300. Will Rosa purchase insurance and, if so, which plan? Show this mathematically.
0.5 Rosa has a 10% chance of getting sick in the next year. If she gets sick, her medical bills will amount to $500. She has a wealth of $1,000. Suppose she has the utility function u(x) = x where x is her net wealth at the end of the year. " a. Calculate AND interpret Rosa's risk premium. b. What is the most that Rosa is willing to pay for an insurance policy that fully covers against her loss? c. Some insurance policies have deductibles. A deductible is an amount of a claim not covered by insurance; it's a fixed portion of the medical bills that the insured person must pay in order to make a claim to their insurer. Suppose Rosa's insurance company provides two plans. Plan A has zero deductibles (good!) but charges a high premium (bad!). Specifically, Plan A charges $55 for $500 of coverage. Plan B has a deductible of $K, where K<500, but charges a premium of just $(55 - .1K). Suppose K =$300. Will Rosa purchase insurance and, if so, which plan? Show this mathematically.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:0.5
Rosa has a 10% chance of getting sick in the next year. If she gets sick, her medical bills will
amount to $500. She has a wealth of $1,000. Suppose she has the utility function u(x) = x
where x is her net wealth at the end of the year.
"
a. Calculate AND interpret Rosa's risk premium.
b. What is the most that Rosa is willing to pay for an insurance policy that fully covers
against her loss?
c.
Some insurance policies have deductibles. A deductible is an amount of a claim not
covered by insurance; it's a fixed portion of the medical bills that the insured person must
pay in order to make a claim to their insurer. Suppose Rosa's insurance company
provides two plans. Plan A has zero deductibles (good!) but charges a high premium
(bad!). Specifically, Plan A charges $55 for $500 of coverage. Plan B has a deductible of
$K, where K<500, but charges a premium of just $(55 - .1K). Suppose K =$300. Will
Rosa purchase insurance and, if so, which plan? Show this mathematically.
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