Gabe Has Wealth of $100,000 and Faces a 5% Probability

question 69

Essay

Gabe has wealth of $100,000 and faces a 5% probability that he will get sick and lose $40,000.
a. What is Gabe's expected wealth?
b. What is Gabe's expected loss?
c. What price would Gabe pay for an actuarially fair insurance policy that would reimburse him the full value of his loss?
d. Suppose that Gabe's certainty equivalent is $97,000. What is Gabe's risk premium?

---

Definitions:

Responsiveness

The quality of reacting quickly and positively to stimuli or needs, often used in customer service, healthcare, and personal relationships.

Easily Consoled

describes a state of being able to be comforted or soothed with relative ease, often used in the context of infants or emotional distress.

Securely Attached

A term describing individuals, especially infants, who have developed strong and healthy emotional bonds with their caregivers, characterized by trust and a sense of safety.

Sensitivity

The capacity to perceive, feel, or be aware of stimuli, situations, or the emotions of others.