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Suppose that Susan has a utility function U= ln(W) where W is her wealth and U is the utility that she gains from wealth. Her
Suppose that Susan has a utility function U= ln(W) where W is her wealth and U is the utility that she gains from wealth. Her initial wealth is $100,000 and she faces a 25% probability of illness. If the illness happens, it would cost her $10,000 to cure it.
- What is Susan's marginal utility when she is well? And when she is sick? Is she risk-averse or risk-loving? (3 points)
- What is her expected wealth with no insurance? (3 points)
- What is her expected utility with no insurance? (3 points)
- What is the actuarially fair premium (expected value of my loss)? ( 5 points)
- Calculate the maximum she is willing to pay for an insurance policy that would cover all her medical costs when they occur. (6 points) Illustrate this in a graph
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