Consider a worker, Janice, who has the option to purchase DI (disability insurance) on the private market. Janice becomes disabled with probability = 0.01. She can purchase DI by paying the premium .

If the Janice is disabled, she will earn no income. But if she is insured, she will receive a total payment of $15,000 from the insurance company (her consumption will be $15,000).

If the Janice is not disabled, she earns an income of $20,000.

She has utility: = 3 1 3 where is the amount of consumption

a. Is the insurance plan offered, full or partial insurance? Explain.

b. Determine the actuarially fair insurance premium, .

c. Write down the expected utility function for Janice if she purchases insurance at the actuarially fair price.

d. Will Janice choose to purchase this disability insurance? Explain.

e. What is the most she would be willing to pay for DI insurance?