Chanda Banda has the following utility function U = √Y., where Y is Chanda's wealth. Assume Chanda faces a risk p of being sick, where p = 19/36. In addition, assume Chanda's initial wealth is K100,000, but when he gets sick, it falls to K64,000. a. Calculate Chanda's marginal utility (MU) of wealth when sick? When well? b. Is Chanda risk averse or risk neutral or a risk lover? c. Calculate Chanda's expected wealth with insurance? d. Calculate Chanda's expected utility with insurance? e. What is Chanda's actuarially fair premium? f. What is that maximum premium Chanda would be willing to pay to shed the risk?

Chanda Banda has the following utility function U = √Y., where Y is Chanda's wealth. Assume Chanda faces a risk p of being sick, where p = 19/36. In addition, assume Chanda's initial wealth is K100,000, but when he gets sick, it falls to K64,000. a. Calculate Chanda's marginal utility (MU) of wealth when sick? When well? b. Is Chanda risk averse or risk neutral or a risk lover? c. Calculate Chanda's expected wealth with insurance? d. Calculate Chanda's expected utility with insurance? e. What is Chanda's actuarially fair premium? f. What is that maximum premium Chanda would be willing to pay to shed the risk?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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