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?

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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