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

question 89

Essay

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

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Definitions:

Neuronal Connections

The links formed between neurons through synapses, which allow for communication within the brain and the nervous system.

Species

A group of living organisms consisting of similar individuals capable of exchanging genes or interbreeding.

Isolated Conditions

Circumstances or areas that are solitary, remote, or separated from others.

Lateralization

Specialization of function in one hemisphere of the cerebral cortex or the other.