Demand for Insurance Find the Expected Utility for the Beneficiary (Baseball Pitcher) Determine the Actuarially Fair Price for the Insurance Policy Find the Maximum Willingness to Pay for the Insurance Policy Legend = Utility W = Wealth (How much the Baseball pitcher would earn) W* = Wealth after paying the maximum the baseball player is willing to pay for insurance A professional baseball player just signed a contract to pitch for the Houston Astros. The contract specified that the player would earn $1,000,000. if he were healthy and could pitch. The contract also specified that he would earn $0. if he became injured and unable to pitch. There is a 10% (.1 probability) chance that the pitcher would become injured. What is the Expected Utility for the Beneficiary (Baseball Pitcher) with insurance? Expected Utility formula à What is the Actuarially Fair price for an Insurance Policy? =probability of loss X size of the loss What is the maximum amount that the baseball pitcher is willing to pay for the Insurance Policy? Maximum willingness to pay = $1,000,000. – W*

Demand for Insurance Find the Expected Utility for the Beneficiary (Baseball Pitcher) Determine the Actuarially Fair Price for the Insurance Policy Find the Maximum Willingness to Pay for the Insurance Policy Legend = Utility W = Wealth (How much the Baseball pitcher would earn) W* = Wealth after paying the maximum the baseball player is willing to pay for insurance A professional baseball player just signed a contract to pitch for the Houston Astros. The contract specified that the player would earn $1,000,000. if he were healthy and could pitch. The contract also specified that he would earn $0. if he became injured and unable to pitch. There is a 10% (.1 probability) chance that the pitcher would become injured. What is the Expected Utility for the Beneficiary (Baseball Pitcher) with insurance? Expected Utility formula à What is the Actuarially Fair price for an Insurance Policy? =probability of loss X size of the loss What is the maximum amount that the baseball pitcher is willing to pay for the Insurance Policy? Maximum willingness to pay = $1,000,000. – W*

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.13P

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