Question

Suppose that everyone is risk averse and has the same utility function and an annual income of $50, 000 but people face different risks to health. Person A has a 20% chance of experiencing a health shock that requires $400 in expenses while Person B has a 0.2% chance of experiencing a health shock that requires $40, 000.

(a) Calculate Person As expected loss.

(b) Calculate Person Bs expected loss.

(c) Graphically illustrate that Person B would be willing to pay a greater risk premium for insurance than Person A.

Answer #1

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State Probability Income Utility
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蜉
If there is a 80% change of good health resulting in an income
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insurance?

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