Suppose utility is V2 where V-the number of healthy vacation days in a planned 10 day vacation. Supposea family has a 30% chance of an illness that could ruin the entire vacation, Suppose a risk neutral insurancecompany exists to provide vacation insurance. Suppose further that each vacation day requires a constantexpenditure, and this expenditure is standard across everybody. This allows us to simplify the problem byconsidering all payments to be in terms of vacation days. What is the least a fair insurance company ignoringadministrative and profit expenses would charge (in terms of vacation days)?a.b. 1C.

Given: Utility: V1/2 V=Number of healthy vacation days Total Vacation=10 days Chance of illness=30%

Answered: Suppose utility is V2 where V-the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Adam presently makes about $40,000 of interest income per year. He realizes that there is about a 5 percent probability that he may suffer a heart attack. The cost of treatment will be about $20,000 if a heart attack occurs. A. Calculate Adam's expected utility level without any health insurance coverage. B. Calculate Adam's expected income without any insurance coverage. C. Suppose Adam must pay a premium of $1,500 for health insurance coverage with BlueCross Blue Shields insurance. Would he buy the health insurance? Why or why not?
Suppose your preferences can characterized by the simple utility function U = √C, where C is consumption. You enjoy rock climbing, where you have a 10% chance of get- ting injured and losing $50,000. Your income (and therefore consumption) in the uninjured state is $90,000. What is the most you are willing to pay for an insurance policy? What is the fee for a fair insurance?
Consider a consumer who can borrow or lend freely at an interest rate of 100% per period of time (think of the period as being, say, 30 years, a bit like with a mortgage). So r = 1.0, or 100%. The consumer's two-period utility function is: U = In(ct) + (1/2)In(Ct+1) The consumer earn Y=100 each period, so Y₁=100 and Yt+1 also equals 100. If this consumer is behaving optimally, trying to maximize her lifetime utility subject to the IBC, what's her consumption in period t?
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and you have a 10% chance of getting sick. Your income when sick is $0 and your income when healthy is $100. 1. Assume your utility over income is U=T ¥ 1. Graph your utility and income with income on the x-axis and utility on the y-axis. Show your income/utility when healthy and sick on the graph. 2. calculate your expected income. Show on graph. 3. calculate your expected utility. Show on graph. 1. Now you are offerred health insurance by Prof. Grossman's Totally Full and Fair Insurance Company. For a premium of $20, you will get a payout of $50 if you get sick. 1. Is the insurance company's name accurate (is this actuarially fair and full)? 2. What is the expected payout from this insurance? 3. What is the Income when sick and income when healthy under insurance? Show on your graph 4. What is the expected income and expected utility under this insurance? Show each on your graph 5. Propose a full and fair insurance given your 10% chance of getting sick and your healthy and sick…
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1. Rosie has just written a book. Assume that her preferences are consistent with expected utility theory. There is 30% chance that her book will be a best-seller and make $500,000 in profit (after the costs of production) and a 70% chance it will just break even (i.e. no profit after the costs of production). Her current income is $150,000 (which she will receive regardless of what happens with her book) and her utility function is u (I) = ln (I) (a) Is Rosie risk-averse, risk-neutral, or risk-loving? How do you know? (b) Assume that Rosie will receive all of the profits (if any) from her book. Draw a diagram illustrating (i) Rosie's total income if her book just breaks even, (ii) her total income if her book is a best-seller, (iii) her expected income, (iv) her expected utility, (v) her certainty equivalent, and (vi) her risk premium. (c) Compute the numerical values associated with each of the six amounts you found in (b). (d) Acme Publishing Company has offered Rosie $100,000 for…
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1. ) Suppose a driver has a 6% of having one accident a year. In case of an accident the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the insurance company would completely cover damage to the car (essentially restoring its value to its initial level). Assume that the driver's utility function is U = VW. a) If price of the insurance policy (premium) is $1500, would this driver be willing to purchase the policy? Explain Show you computations b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?

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