Suppose a new and terrifying disease called bhtitis has been created in a mad scientist’s laboratory. In a recently-released study, medical researchers determined that the average Pcorian adult has a 0.1% chance of catching bhtitis in the coming year. Suppose all Pcorians have the following utility function: U = √I where I = $100 if the Pcorian is well and I = $0 if the Pcorian catches bhtitis. (a) A young woman hears a brief news item about the research study on the radio, and learns she has a 0.1% chance of catching bhtitis this year. What is her expected utility without insurance? (b) The young woman is offered an insurance contract that has a premium of $1 but pays out $100 if the woman comes down with bhtitis this year. Will she take the contract, according to expected utility theory?
Suppose a new and terrifying disease called bhtitis has been created in a mad scientist’s laboratory. In a recently-released study, medical researchers determined that the average Pcorian adult has a 0.1% chance of catching bhtitis in the coming year.
Suppose all Pcorians have the following utility function:
U = √I
where I = $100 if the Pcorian is well and I = $0 if the Pcorian catches bhtitis.
(a) A young woman hears a brief news item about the research study on the radio, and learns she has a 0.1% chance of catching bhtitis this year. What is her expected utility without insurance?
(b) The young woman is offered an insurance contract that has a premium of $1 but pays out $100 if the woman comes down with bhtitis this year. Will she take the contract, according to expected utility theory?
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