Question
please answer these two questions 1. Assume a typical individual has the following utility function: u = y.5 where y = income. Assume also that
please answer these two questions
1. Assume a typical individual has the following utility function: u = y.5 where y = income. Assume also that this individual has y = $50, 000 but faces a 15% chance of being involved in an accident that would reduce their income by $5, 000. Faced with this level of uncertainty, what is this persons expected utility?
2. Building off of Q1 above, if someone purchases perfect insurance they now have 100% certainty about what their net income will be. (That is, having insurance holds their net income constant regardless of whether or not they are involved in an accident.) Someones guaranteed utility then becomes: u = (y premium).5 where the term = net income y premium is entered into the utility function in place of y. What is this persons WTP for insurance?1 Please included a figure similar to what was shown in class to convey this point.
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