Assume your utility over income is U=T and you have a 10% chance of getting sick. Your income when sick is $0 and your income when healthy is $100. 1. Graph your utility and income with income on the x-axis and utility on the y-axis. Show your income/utility when healthy and sick on the graph. 2. calculate your expected income. Show on graph. 3. calculate your expected utility. Show on graph. 1. Now you are offerred health insurance by Prof. Grossman's Totally Full and Fair Insurance Company. For a premium of $20, you will get a payout of $50 if you get sick. 1. Is the insurance company's name accurate (is this actuarially fair and full)? 2. What is the expected payout from this insurance? 3. What is the Income when sick and income when healthy under insurance? Show on your graph 4. What is the expected income and expected utility under this insurance? Show each on your graph 5. Propose a full and fair insurance given your 10% chance of getting sick and your healthy and sick incomes. 1. What is the premium and payout, show on the graph your utility in this situation.

Assume your utility over income is U=T and you have a 10% chance of getting sick. Your income when sick is $0 and your income when healthy is $100. 1. Graph your utility and income with income on the x-axis and utility on the y-axis. Show your income/utility when healthy and sick on the graph. 2. calculate your expected income. Show on graph. 3. calculate your expected utility. Show on graph. 1. Now you are offerred health insurance by Prof. Grossman's Totally Full and Fair Insurance Company. For a premium of $20, you will get a payout of $50 if you get sick. 1. Is the insurance company's name accurate (is this actuarially fair and full)? 2. What is the expected payout from this insurance? 3. What is the Income when sick and income when healthy under insurance? Show on your graph 4. What is the expected income and expected utility under this insurance? Show each on your graph 5. Propose a full and fair insurance given your 10% chance of getting sick and your healthy and sick incomes. 1. What is the premium and payout, show on the graph your utility in this situation.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 7MC

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Consider an individual who faces two possible states of the world. With 20 percent probability he will face a bad state of the world, in which he must pay out $100 in health care expenses, and in the good state of the world he has no health care expenses. In either state of the world he earns income of $100 and consumes his income less his health care expenses. He is offered an opportunity to pay $20 up front (thereby reducing his consumption by $20 in either state of the world) for a health insurance contract that promises to pay him $100 to cover health care expenses in the bad state of the world. He seeks to maximize expected utility, where the utility he would derive in any state of the world is given by C0.5, where C is his consumption in that state of the world. a. Calculate the expected value of his consumption, first assuming that he does not purchase insurance and then assuming that he does. b. Calculate his expected utility, first assuming that he does not purchase insurance…
Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
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Give 1 problem solving example of Expect Value Maximization and its solutions using this formula.
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