Suppose That an Economist Has a Utility Function U =

question 9

Essay

Suppose that an economist has a utility function U = (Income)0.25. Her income is $65K a year, but there is a 10 percent chance of becoming ill and making only $57K.
(a)What is her expected utility if she does not have insurance?
(b)What is the actuarially fair insurance premium?
(c)How much is she willing to pay for insurance?

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Definitions:

Financial Security

Refers to the state of having stable income or other resources to support a standard of living now and in the foreseeable future.

Legally Required

Pertains to obligations or actions that are mandated by law for individuals or organizations to follow.

Workforce

The group of individuals engaged in or available for work, either in a country or a specific company.

Collectively Liable

A situation where all members of a group are equally responsible for the group's obligations or debts.