Sam has a saving of $30,000 to start with and he is looking for private health...

Sam has a saving of $30,000 to start with and he is looking for private health insurance. His chance of getting cancer is 2% and his utility function U =√ Savings (utility is the square root of savings). He has three options: 1) do not buy the insurance and suffer the loss of $30,000 if he gets cancer; 2) buy partial insurance that provides coverage of $15,000 in the event of cancer, at the cost of $300 premium; 3) buy the full insurance that provides full coverage of $30,000 in the event of cancer, at the cost of $600. Using the expected utility (EU) function below to discuss which option Sam will choose.

EU= (1− p) * U0 + p*U1

Where

• p stands for the probability of cancer

• U is the utility given savings.

Expert Solution

Sam will choose Option (3) with insured and coverage of $30000 and Premium $600

Rahul Sunny answered 2 years ago

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