Answer to Question #51183 in Microeconomics for zem lotjem
Let her utility function be given as U(y) =y1/2 suppose that an insurance company offers to fully insure Sita against loss of earnings caused by illness against an actuarially fair premium.
(a) Will Sita accept the insurance? Explain.
(b) What is the maximum amount that Sita would pay for the insurance?
If she falls ill - Rs. 25, p = 2/3
(a) Sita may accept the insurance, if the probability of illness is too
high and the insurance payment is affordable. As p = 2/3, Sita will
accept the insurance.
(b) The maximum amount that Sita would pay for the insurance can be calculated according to probabilities:
i(max) = 100*1/3 + 25*2/3 = 33.33 + 16.67 = 50
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