Question 1: Your income is $4900and your utility is equal to the square root of your income.You have a 20%chance of getting sick; if you do,you incur $2400 in medical costs.Now consider the effect of insurance. You can get full insurance, which would completely cover the cost of sickness, for a premium of $500. What would be your expected utility if you purchased insurance?

sqrt(4900+500)=73.49

sqrt(4900-500)*.2+sqrt(2500-500)*.8=49.04

sqrt(4900-500)=66.33

sqrt(4900-500)*.8+ sqrt(2500-500)*.2=62.01

Question 2: What would be your expected income, if your purchased full insurance in the above example?

5400

4400

4640

3600

Question 3: You want to maximize your utility. Do you choose to go without insurance,to get full insurance, or to get partial insurance?(Using scenario above.)

Indifferent

Insufficient information

Partial insurance

Full insurance

No insurance