U = ln(C), where C is consumption. She makes $30,000 per year and enjoy jumping out of airplanes. There's a 5% chance that in the next year, she will break both legs, incur medical costs of $15,000, and lose an additional $5,000 from missing work.
U = ln(C), where C is consumption. She makes $30,000 per year and enjoy jumping out of airplanes. There's a 5% chance that in the next year, she will break both legs, incur medical costs of $15,000, and lose an additional $5,000 from missing work.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Seung’s utility function is given by U = ln(C), where C is consumption. She makes $30,000 per year and enjoy jumping out of airplanes. There's a 5% chance that in the next year, she will break both legs, incur medical costs of $15,000, 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 her expected utility if she buys it?
(c) Suppose Seung can buy insurance that will cover her medical expenses and forgone salary. How much would such a policy cost if it's actuarially fair, and what is her expected utility if she buys it?
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