On a separate sheet of paper, draw a utility function for an individual that exhibits diminishing marginal utility from income, with income on the horizontal axis, and utility on the vertical axis. Consider an individual with $80,000 income, and label this level of income and corresponding utility (U(80,000)) on your graph. Say this individual faces an 20% chance of a catastrophic health problem that costs $60,000. Calculate expected income, after health costs. Show your work. Draw a chord on your graph that can illustrate expected utility based on expected income. Label expected utility. What is the actuarially fair price of insurance? Label the risk premium that represents the most this person would be willing to pay, in addition to the actuarially fair price, to avoid this risk.

On a separate sheet of paper, draw a utility function for an individual that exhibits diminishing marginal utility from income, with income on the horizontal axis, and utility on the vertical axis. Consider an individual with $80,000 income, and label this level of income and corresponding utility (U(80,000)) on your graph. Say this individual faces an 20% chance of a catastrophic health problem that costs $60,000. Calculate expected income, after health costs. Show your work. Draw a chord on your graph that can illustrate expected utility based on expected income. Label expected utility. What is the actuarially fair price of insurance? Label the risk premium that represents the most this person would be willing to pay, in addition to the actuarially fair price, to avoid this risk.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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