JOb paying $50,000 per year. injured and unable to work for part of the year reducing your wages to $20,000 next year. a probability of 5%, you asoddns a. What is your expected income next year? b. Suppose that you could fully insure against the risk of reduced income next year. What would be the actuarially fair premium? c. If your utility function is U = VI where C is your income in any given period, what is %3D your expected utility without insurance? d. If your utility function is U = VI where C is your income in any given period, what is %3D your expected utility with insurance?

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.5P
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Suppose that you have a job paying $50,000 per year. With a probability of 5%, you will be
injured and unable to work for part of the year reducing your wages to $20,000 next year.
a. What is your expected income next year?
b. Suppose that you could fully insure against the risk of reduced income next year. What
would be the actuarially fair premium?
c. If your utility function is U = VI where C is your income in any given period, what is
your expected utility without insurance?
d. If your utility function is U = VI where C is your income in any given period, what is
your expected utility with insurance?
Transcribed Image Text:Suppose that you have a job paying $50,000 per year. With a probability of 5%, you will be injured and unable to work for part of the year reducing your wages to $20,000 next year. a. What is your expected income next year? b. Suppose that you could fully insure against the risk of reduced income next year. What would be the actuarially fair premium? c. If your utility function is U = VI where C is your income in any given period, what is your expected utility without insurance? d. If your utility function is U = VI where C is your income in any given period, what is your expected utility with insurance?
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