Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. If you remain healthy, you expect to earn an income of $160,000. If, by contrast, you become disabled, you will only be able to
3. If you remain healthy, you expect to earn an income of $160,000. If, by contrast, you become disabled, you will only be able to work part time, and your average income will drop to $40,000. Suppose that you believe that there is a 5 percent chance that you could become disabled. Furthermore, your utility function is I. (a) What is your expected income? What is your expected utility? (b) Consider an insurance policy that fully insures you in the event that you are disabled. What is the actuarially fair insurance premium? In other words, suppose that you pay x for an insurance that gives you $120,000 extra income when you become disabled. For what value of x is the insurance actuarially fair? (c) What is the highest premium that you would be willing to pay for the full insurance policy? 3. If you remain healthy, you expect to earn an income of $160,000. If, by contrast, you become disabled, you will only be able to work part time, and your average income will drop to $40,000. Suppose that you believe that there is a 5 percent chance that you could become disabled. Furthermore, your utility function is I. (a) What is your expected income? What is your expected utility? (b) Consider an insurance policy that fully insures you in the event that you are disabled. What is the actuarially fair insurance premium? In other words, suppose that you pay x for an insurance that gives you $120,000 extra income when you become disabled. For what value of x is the insurance actuarially fair? (c) What is the highest premium that you would be willing to pay for the full insurance policy
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started