E2 a. Ralph is choosing whether to purchase healthinsurance. Here are the features that define hissituation:He currently has $20,000 in initial wealth andfaces a 2% chance of a serious illness that will cost$8,000 to cure. (He therefore simultaneously facesa 98% chance that he won't face harm.)He has the option to purchase an insurance policyfor the price of $1,000. If he purchases insuranceand gets ill, his insurance company willcompensate him for the $8,000 cost of the cure.His utility function for money is U(M) = M.He has the option to not purchase insurance, buthe must pay a fine of $X if he chooses to gouninsured.a. Set up the equation (but do not solve it) tofind the amount of the fine (X) that makes himindifferent between purchasing insurance andgoing uninsured.b.True or false, and explain: According toSeabright, because of information asymmetriesbetween consumers and sellers, consumershave to put in a lot of time and effort to ensurethat sellers are trustworthy.

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Ralph is choosing whether to purchase health insurance. Here are the features that define his situation: He currently has $20,000 in initial wealth and faces a 2% chance of a serious illness that will cost $8,000 to cure. (He therefore simultaneously faces

Ralph is choosing whether to purchase health insurance. Here are the features that define his situation: He currently has $20,000 in initial wealth and faces a 2% chance of a serious illness that will cost $8,000 to cure. (He therefore simultaneously faces

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

a. Ralph is choosing whether to purchase health
insurance. Here are the features that define his
situation:
He currently has $20,000 in initial wealth and
faces a 2% chance of a serious illness that will cost
$8,000 to cure. (He therefore simultaneously faces
a 98% chance that he won't face harm.)
He has the option to purchase an insurance policy
for the price of $1,000. If he purchases insurance
and gets ill, his insurance company will
compensate him for the $8,000 cost of the cure.
His utility function for money is U(M) = M.
He has the option to not purchase insurance, but
he must pay a fine of $X if he chooses to go
uninsured.
a. Set up the equation (but do not solve it) to
find the amount of the fine (X) that makes him
indifferent between purchasing insurance and
going uninsured.
b.True or false, and explain: According to
Seabright, because of information asymmetries
between consumers and sellers, consumers
have to put in a lot of time and effort to ensure
that sellers are trustworthy.

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