7.4 Develop a graph to show the utility obtainable under each strategy. Which strategy will be preferable?

Could utility be improved further by taking more than two trips? How would this possibility be affected if additional trips were costly?

A health insurance company considers the risk to a Sherpa who has a current wealth of 20 000 renminbi (RMB), working in the Himalayas, incurring an injury in the per formance of their duties which that will cost 10 000 RMB in medical care is 50 per cent.

a.

Calculate the cost of actuarially fair insurance in this situation and use a utility-of-wealth graph

(such as shown in Figure 7.1) to show that the individual will prefer fair insurance against injury to accepting the position uninsured.

b.

Suppose two types of insurance policies were available:

(1) a fair policy covering fully comprehensive cover; and

(2) a fair policy requiring a co-payment by the insured of half of any medical expenses claimed.

Calculate the cost of the second type of policy and show that the individual will generally regard it as inferior to the first.