Question 4. If you remain healthy, you expect to earn an income of 100,000. If, by contrast, you become disabled, you will only be able to work part time, and your average income will drop to 20,000. Suppose that there is a 0.05 chance that you could become disabled. If your utility function from income is [1(1) = , what is the most that you would be willing to pay for an insurance policy that fully insures you in the event that you are disabled? Answer: The initial expected utility is 0.95 U(100,000) + 0.05 U(20,000) = OBS-316.22 + 0.05-141.42 = 307.48 Therefore, U(100,000 b) = 307.48, or (100,000 lb)\"2 = 307.48 Hence, 100,000 b : 94,544 and b : 5,456