Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function c. Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. 1. Suppose the actuarially fair premium charge is 2600, Calculate Tess’ expected utility with full insurance if she is charged the premium. Round to two decimal places.
Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function c. Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event.
1. Suppose the actuarially fair premium charge is 2600, Calculate Tess’ expected utility with full insurance if she is charged the premium. Round to two decimal places.
2. What is the premium that private insurance companies will charge for full insurance? Round to two decimal places.
3.Assume the social welfare function is the sum of the Tess’ and Lex’s utility functions. Select the correct statement regarding the explanation for what has happened in the private market and the role of social insurance.
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Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function c. Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event.
Assume the social welfare function is the sum of the Tess’ and Lex’s utility functions. Select the correct statement regarding the explanation for what has happened in the private market and the role of social insurance.
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