Question

Suppose you face a choice between a certain income of $3,000, or a 50-50 chance of income of $1,500 or $4,500. Suppose you prefer the 50-50 chance of $1,500 or $4,500

1. True or False: You are not risk averse

a) True

b) False

Suppose that a disease affects 4% of the population and that everyone is equally likely to get the disease. Treatment for this disease costs $28,000. Assume that this disease, and necessary treatment, represent the only healthcare costs in this population

2. The expected cost of healthcare is $__________.

3. If people (Prefer/ Do Not Prefer) to pay the expected cost of healthcare with certainty, rather than take on the 4% risk of having to pay the full cost of the treatment, they are risk averse.

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Answer 1

1) THe answer is A -) TRUE.

because a risk averse is one who declined or reluctant to take risk. it is the one who does not take risk. and here we have a choice , so we take a risk of 50-50 chance of income of $1500 or $4500.

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Answer 2

Suppose that there is one person who faces two choices- a certain income of $3000 or 50-50 chance of S1500 or $4500 He prefers the 50-50 chance of $1500 or S4500. Risk averse is the person who is not willing to take risks. He prefers investment with sure return and stays away from the high-risk investment. Yes, the person is not risk averse. because a risk averse is one who declined or reluctant to take risk. it is the one who does not take risk and here we have a choice, so we take a risk of 50-50 chance of income of $1500 or $4500 Thus, the statement is true 2. Now, suppose that disease affects 4% of the population and everyone is equal likely to get the diseases. The cost of the diseases is S28,000. Find the expected cost. Expected cost = % of population affect * cost of diseases+ (1-% of population affect) * SO 0.04* 28000 (1-0.04) *S0 $1,120 Thus, expected cost is $1120 If people Prefer to pay the expected cost of healthcare with certainty, rather than take on the 4% risk of having to pay the full cost of the treatment, they are risk averse.