suppose your wealth is Rs 1 Crore. You are going to travel abroad and are worried about falling sick on your trip and incurring big health -care expenditure. In particular here is the gamble (X) you face: With prob. 0.1 you fall sick and incur a loss of Rs. 20 Lakh. With prob. 0.9 you don't fall sick and there is no loss. suppose you are risk averse and your utility function of wealth is U(w) = w^0.5 What is the maximum you are willing to pay for full insurance? Jack has wealth of 10 crore. His utility function of wealth isU(w) = w. (a) Calculate the expected utility of Jack if he sells you the insurance for an upfront price of Rs. Q (b) What is the smallest value of Q for which Jack is willing to sell this insurance? (c) Will there be a trade of insurance? (d) Repeat parts (a), (b) and (c) assuming that Jacks wealth is 1 crore.Does your answer to parts (b) and (c) change? Why or why not?
suppose your wealth is Rs 1 Crore. You are going to travel abroad and are worried about falling sick on your trip and incurring big health -care expenditure. In particular here is the gamble (X) you face: With prob. 0.1 you fall sick and incur a loss of Rs. 20 Lakh. With prob. 0.9 you don't fall sick and there is no loss. suppose you are risk averse and your utility function of wealth is U(w) = w^0.5 What is the maximum you are willing to pay for full insurance? Jack has wealth of 10 crore. His utility function of wealth isU(w) = w. (a) Calculate the expected utility of Jack if he sells you the insurance for an upfront price of Rs. Q (b) What is the smallest value of Q for which Jack is willing to sell this insurance? (c) Will there be a trade of insurance? (d) Repeat parts (a), (b) and (c) assuming that Jacks wealth is 1 crore.Does your answer to parts (b) and (c) change? Why or why not?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:suppose your wealth is Rs 1 Crore. You are going to travel abroad and are worried about falling sick on your trip and incurring big health
-care expenditure. In particular here is the gamble (X) you face:
With prob. 0.1 you fall sick and incur a loss of Rs. 20 Lakh.
With prob. 0.9 you don't fall sick and there is no loss. suppose you are risk averse and your utility function of wealth is U(w) = w^0.5
What is the maximum you are willing to pay for full insurance?
Jack has wealth of 10 crore. His utility function of wealth isU(w) = w. (a) Calculate the expected utility of Jack if he sells you the
insurance for an upfront price of Rs. Q (b) What is the smallest value of Q for which Jack is willing to sell this insurance? (c) Will there
be a trade of insurance? (d) Repeat parts (a), (b) and (c) assuming that Jacks wealth is 1 crore.Does your answer to parts (b) and (c)
change? Why or why not?
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