Question
your utility function is given byU = ln(C)where C is consumption andln refers to the natural logarithm. Your annual income is $50,000. There is a
your utility function is given byU = ln(C)where C is consumption andln refers to the natural logarithm. Your annual income is $50,000. There is a 5% chance that in the next year you'll break both legs, leading to medical costs of $10,000 and $15,000 in lost income from missing work.
1) what is your expected utility (EU) without insurance?
2) suppose you can buy insurance that will cover both your medical expenses and lost income. What would be the actuarially fair premium?
3) what will be your expected utility if you buy full insurance at the actuarially fair price?
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