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only need band c please do not copy from others, they are wrong!!! Question 3: Suppose an individual has the utility function defined over wealth
only need band c please do not copy from others, they are wrong!!!
Question 3: Suppose an individual has the utility function defined over wealth received with certainty equal to the square root of wealth. The individual has an initial wealth level of $20,000. a. The individual has a 20% chance of a heart attach and the loss associated with the attach is $5,000. What is the expected loss from the heart attack? What is the maximum amount this individual is willing to pay for full insurance against the risk of a heart attack? What is the risk premium? (5 marks) b. Suppose now that the individual's utility function is u(w)=2w+100. What is the expected loss from the heart attack? What is the maximum amount this individual is willing to pay for full insurance against the risk of a heart attack? What is the risk premium? (5 marks) c. Is the individual in part a more, less, or equally risk-averse than the individual in part b? Explain your answer. (3 marks) Question 3: Suppose an individual has the utility function defined over wealth received with certainty equal to the square root of wealth. The individual has an initial wealth level of $20,000. a. The individual has a 20% chance of a heart attach and the loss associated with the attach is $5,000. What is the expected loss from the heart attack? What is the maximum amount this individual is willing to pay for full insurance against the risk of a heart attack? What is the risk premium? (5 marks) b. Suppose now that the individual's utility function is u(w)=2w+100. What is the expected loss from the heart attack? What is the maximum amount this individual is willing to pay for full insurance against the risk of a heart attack? What is the risk premium? (5 marks) c. Is the individual in part a more, less, or equally risk-averse than the individual in part b? Explain yourStep by Step Solution
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