Seung's utility function is given by U - C^(1/2), where C is consumption and C^(1/2) is the square root of consumption. She makes $50,625 per year and enjoys jumping out of airplanes. There's a 5% chance that in the next year, she will break both legs, incur medical costs of $30,000, and lose an additional $5,000 from missing work. a. What is Seung's expected utility without insurance? b. Suppose Seung can buy insurance that will cover the medical expenses but not the forgone part of her salary. How much would an actuarially fair policy cost, and what is the expected utility if she buys it? Policy cost: $___ Expected utility: ___ c. Suppose Seung can buy insurance that will cover her medical expenses and foregone salary. How much would such a policy cost if it's actuarially fair, and what is her expected utility if she buys it? Policy cost: $___ Expected Utility: ___
Seung's utility function is given by U - C^(1/2), where C is consumption and C^(1/2) is the square root of consumption. She makes $50,625 per year and enjoys jumping out of airplanes. There's a 5% chance that in the next year, she will break both legs, incur medical costs of $30,000, and lose an additional $5,000 from missing work.
a. What is Seung's expected utility without insurance?
b. Suppose Seung can buy insurance that will cover the medical expenses but not the forgone part of her salary. How much would an actuarially fair policy cost, and what is the expected utility if she buys it?
Policy cost: $___
Expected utility: ___
c. Suppose Seung can buy insurance that will cover her medical expenses and foregone salary. How much would such a policy cost if it's actuarially fair, and what is her expected utility if she buys it?
Policy cost: $___
Expected Utility: ___
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