Question

In: Economics

Want clear answer for part a and b plz; Assume that an individual is risk-averse and...

Want clear answer for part a and b plz;

Assume that an individual is risk-averse and has a utility function regarding income that can
is described mathematically as U =√Y. The benefits of increased income are positive, but declining
marginal utility.
A person with that benefit function knows that there is a ten (10) percent risk of being ill. He is in
average sick every ten days. The person receives 1,000 dollar per day when he works, which means
that the expected salary is 0.90 * 1000 per day.

a) How high an insurance premium is the individual willing to pay to get a guaranteed one
salary amount (of 1000 dollar minus the premium), even days with sick leave?
b) Within which interval can the insurance premium end up, given that all individuals have the same
utility function and average sick leave? ( it depends on the competition
between the insurance companies!)

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
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