Consider Brandy who has an initial wealth of $200,000. Over the next year, Brandy faces a 10% risk of getting a grave illness that will cost $100,000 to treat.
a. What is the actuarially fair price of insurance?
Explain.
b. What is her expected utility without insurance if
U(Wealth=100,000)=200 and U(Wealth=200,000)=340?
c. Brandy is willing to pay up to $15,000 for insurance that
will cover the entire cost of care should she become ill. What does
this tell you about Brandy?
d. Draw a utility of wealth curve for Brandy that is consistent
with the information in parts a-c.
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