Amy’s utility function is U = √ C, where C is consumption and is given by...

Amy’s utility function is U = √ C, where C is consumption and is given by C = Income − Expenses. Amy’s income is $10,000 and there is a 5% chance that she will get sick, which would cost $3,600 in medical expenses.

(a) (5 points) What is Amy’s expected utility if she doesn’t have insurance?

(b) (5 points) What is the actuarially fair premium for a full-coverage insurance plan? What is the actuarially fair premium for an insurance plan that provides 50% coverage?

(c) (5 points) What is the maximum premium that Amy would be willing to pay for a full-coverage insurance plan?

(d) (5 points) Suppose now there’s a government mandate: everyone must either buy full-coverage health insurance at a premium of $200, or pay a fine of $150 and stay uninsured. Would Amy purchase the health insurance or not?

Expert Solution

D) as EU is higher with insurance, than with fine,

So insurance will be bought

Rahul Sunny answered 1 year ago

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Amy’s utility function is U = √ C, where C is consumption and is given by...

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