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Use the following to answer questions 1-3: You enjoy riding bicycles down steep mountains. You estimate that in the next year, there is a 4%
Use the following to answer questions 1-3: You enjoy riding bicycles down steep mountains. You estimate that in the next year, there is a 4% probability you will crash and incur medical bills of $20,000, which is equal to your salary, and a 96% chance that you will not be injured at all. Assume your utility depends only on your consumptionfincome in either possible outcome. 1. Ifyou buy ll] insurance, which of the following combinations could represent your utility if you are injured or not injured, respectively? A) uninjured: 34; injured: 1 B) uninjured: 500', injured: 20 C) uninjured: 180; injured: 190 D) Both a and b are possible. E) None of the above is possible. 2. Suppose that you instead buy only partial insurance. 'Which of the following combinations could represent your utility if you are injured or not injured, respectively? A) uninjured: 34; injured: 1 B) uninjured: 500', injured: 20 C) uninjured: 180; injured: :90 D) Both a and b are possible. E) None of the above is possible. 3. Ifyou buy M insurance at an actuarially fair premium, which of the following could represent the value of goods consumed if you are injured or not injured, respectively? A) uninjured: $20,000: injured: $20,000 B) uninjured: $19,400: injured: $19,400 C) uninjured: $19,200; injured: $19,200 D) uninjured: $20,000; injured: $0 E) Both b and c are possible
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