1. Suppose a person's utility is equal to U = VY and the initial income is $80,000. Medical expenses for a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual is required to pay the actuarially fair premium (r = p * M). a. What is the expected income when you are healthy? When you are sick? b. What is the expected utility if you buy insurance? What is the expected utility without insurance? What is the actuarially fair premium for the individual? C.

1. Suppose a person's utility is equal to U = VY and the initial income is $80,000. Medical expenses for a sick person amount to $40,000 and the probability of getting sick is 25%. Assume that the individual is required to pay the actuarially fair premium (r = p * M). a. What is the expected income when you are healthy? When you are sick? b. What is the expected utility if you buy insurance? What is the expected utility without insurance? What is the actuarially fair premium for the individual? C.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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