Question

Your utility function is given by U = , where C is consumption. You make $175,000 per year and enjoy jumping off bridges attached to a bungee cord. There's a 10% chance that, in the next year, you'll break both legs and will incur medical costs of $30,000 and will lose an additional $60,000 from missing work because of the loss of a working pair of legs for half the year.

A.) What is your expected utility without insurance for the next year?

B.)Suppose you can buy insurance that will cover the medical expenses but not the foregone part of your salary. How much is an actuarially fair policy? $

C.)Suppose you can buy insurance that will cover your medical expenses AND foregone salary. If you are charged a total of $9000 as a premium for this insurance, what is your expected utility with this insurance?

PLEASE SHOW WORK

Answer 1

$) , UCC) = 130, CG - Good state anon = 175,000 &PG=09 PB= o1 CB = 30,000+ 60,000 a) EU = .9 U((75000) + oy 4(1753000 - 90,000) = .9 N 3x 175,000 to 1 U (85,000) = .9 .525,000 tol N3485,000 Chord - 09.525,000 fol N 255,000 E4.2 702.609 Ang b.) | Actuarially fail policy= loss x loss prob - 30,00 o xol v = $3000 Ans WG' - 175,000 -9000 = 166,000 WB' = 1075,000 - 90,000-9000+ 90,000 T = 166,000 then EU = √3x 166,000 EU = .705.69 Ang