I need help answering question 1 a-c. Please note: this is not graded work. This test has already been graded. I am trying to find out how I can correct my answers. 1. Consider a situation where a person is faced with a risky situation. Assume the currentincome is $100,000 and there is a 90 percent probability that the person will not sufferany illness. There is, however, a 10 percent chance of contracting a viral disease leadingto a loss of $20,000 in income. Let the utility function be given byb)U = 10.4, where I is income.a.Suppose that the person could purchase insurance against the loss of income.What is the certainty equivalent? (4) CE =b.What is the maximum premium that the person would be willing to pay forinsurance? (3)c. What is the risk premium? (3) 100,000-20,0000.4a) CE÷. 9 (100,000) * - . 1 (80,000)= 90-9.146CE = 80.854U=(80,000 the maximum promiumU= 91.46 ? that the person would bewilling topay for insorenceis 91.46w780,000?c) Risk premium = 100,000-20,000,80,000262

Given Probability of being healthy p =90% Probability of illness q =10% Current income I0=$100,000…

Consider a situation where a person is faced with a risky situation. Assume the current income is $100,000 and there is a 90 percent probability that the person will not suffer any illness. There is, however, a 10 percent chance of contracting a viral disease leading to a loss of $20,000 in income. Let the utility function be given by U = 10.4, where I is income. C Suppose that the person could purchase insurance against the loss of income. What is the certainty equivalent? (4) CE = b. What is the maximum premium that the person would be willing to pay for insurance? (3) c. What is the risk premium? (3) 100,000-20,000

Consider a situation where a person is faced with a risky situation. Assume the current income is $100,000 and there is a 90 percent probability that the person will not suffer any illness. There is, however, a 10 percent chance of contracting a viral disease leading to a loss of $20,000 in income. Let the utility function be given by U = 10.4, where I is income. C Suppose that the person could purchase insurance against the loss of income. What is the certainty equivalent? (4) CE = b. What is the maximum premium that the person would be willing to pay for insurance? (3) c. What is the risk premium? (3) 100,000-20,000

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

I need help answering question 1 a-c.

Please note: this is not graded work. This test has already been graded. I am trying to find out how I can correct my answers.

1. Consider a situation where a person is faced with a risky situation. Assume the current
income is $100,000 and there is a 90 percent probability that the person will not suffer
any illness. There is, however, a 10 percent chance of contracting a viral disease leading
to a loss of $20,000 in income. Let the utility function be given by
b)
U = 10.4, where I is income.
a.
Suppose that the person could purchase insurance against the loss of income.
What is the certainty equivalent? (4) CE =
b.
What is the maximum premium that the person would be willing to pay for
insurance? (3)
c. What is the risk premium? (3) 100,000-20,000
0.4
a) CE÷. 9 (100,000) * - . 1 (80,000)
= 90-9.146
CE = 80.854
U=(80,000 the maximum promium
U= 91.46 ? that the person would be
willing to
pay for insorence
is 91.46
w
780,000?
c) Risk premium = 100,000-20,000,
80,000
26
2

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