# Answer to Question #52713 in Microeconomics for Jahnavi

Question #52713

and what if her probability to fall ill is 2/3 while the probability of remaining in good health is 1/3...............let her utility function be given as U(y)=Y powered1/2? then?

(a)will sita accept the insurance?

(b)what is the maximum amountt that sita pay for insurance?

(a)will sita accept the insurance?

(b)what is the maximum amountt that sita pay for insurance?

Expert's answer

Future earnings - Rs. 100, p = 1/3­

If she falls ill - Rs. 25, p = 2/3­

U(y) =y1/2­

(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

If she falls ill - Rs. 25, p = 2/3­

U(y) =y1/2­

(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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