Question

Suppose that Elizabeth has a utility function U= (or U=W^(1/3) ) where W is her wealth and U is the utility that she gains from wealth. Her initial wealth is $1000 and she faces a 25% probability of illness. If the illness happens, it would cost her $875 to cure it.

- What is Elizabeth’s marginal utility when she is well? And when she is sick? Is she risk-averse or risk-loving?
- What is her expected wealth with no insurance?
- What is her expected utility with no insurance?
- What is the actuarially fair premium (expected value of my loss)?
- What is the most I would be willing to pay to shed the risk?
Suppose that Elizabeth has a utility function U= (or U=W^(1/3) ) where W is her wealth and U is the utility that she gains from wealth. Her initial wealth is $1000 and she faces a 25% probability of illness. If the illness happens, it would cost her $875 to cure it.

- What is Elizabeth’s marginal utility when she is well? And when she is sick? Is she risk-averse or risk-loving?
- What is her expected wealth with no insurance?
- What is her expected utility with no insurance?
- What is the actuarially fair premium (expected value of my loss)?
- What is the most I would be willing to pay to shed the risk?

Answer #1

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