Can you answer part A and B please? I do not understand them. Thank you so much :) Part A. Suppose Rock earns $100,000 if he is healthy, and $80,000 if he falls ill. Suppose further that he has a 0.25% chance of falling ill. If Rock were to purchase full insurance, the payout would be equal to ____. The actuarially fair premium for this payout would be equal to ____. $100,000; $250 $50; $20,000 $70,000; $350 $20,000; $50 $350; $70,000 PART B: Suppose that there is a 20% chance Malik is injured and earns
Can you answer part A and B please? I do not understand them. Thank you so much :)
Part A.
Suppose Rock earns $100,000 if he is healthy, and $80,000 if he falls ill. Suppose further that he has a 0.25% chance of falling ill. If Rock were to purchase full insurance, the payout would be equal to ____. The actuarially fair premium for this payout would be equal to ____.
$100,000; $250
$50; $20,000
$70,000; $350
$20,000; $50
$350; $70,000
PART B:
Suppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays healthy and will earn $500,000. Suppose further that his utility function is the following (utility = square root of income)
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Malik's utility if he earns $100,000 is ____ and his utility if he earns $500,000 is ____.
Suppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays healthy and will earn $500,000. Suppose further that his utility function is the following (utility = square root of income)
Malik's utility if he earns $100,000 is ____ and his utility if he earns $500,000 is ____.
100; 511.62
223.6; 707.1
511.62; 100
316.2; 707.1
707.1; 223.6
707.1; 316.2
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