Question
Bill's income is $50,000. There is a 30% chance Bill will get sick during the next year. If Bill gets sick, he will incur a
Bill's income is $50,000. There is a 30% chance Bill will get sick during the next year. If Bill gets sick, he will incur a loss of $20,000. His utility function is U(I)=I1.1(that is, utility equals Income to the 1.1 power).
a) Calculate the actuarially fair insurance premium for Bill (5 points)
b) If the insurance company charges Bill an actuarially fair insurance premium, will Bill purchase Insurance? Explain why or why not. (5 points)
c) If the insurance company charges Bill a premium of $5,000, will Bill purchase Insurance?Explain why or why not. (5 points)
e) Show a-c using a diagram (5 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started