EBK HEALTH ECONOMICS
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ISBN: 9781137029973
Author: TU
Publisher: YUZU
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Chapter 7, Problem 4E
To determine
Determine whether the given statement is true or false.
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Indicate whether the statement is true or false, and justify your answer.There are no possible utility functions in which a person is indifferent between actuarially fair, full insurance and actuarially fair, partial insurance.
Indicate whether the statement is true or false, and justify your answer.Risk-averse consumers always prefer insurance that is actuarially fair but not full to full insurance that is actuarially unfair – but the opposite is true for risk-loving consumers.
Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U’ > 0) and convex (U” > 0).
Draw a utility function in U - I space that fits this description.
Explain the connection between U” and risk aversion.
True or false: this individual prefers no insurance to an actuarially fair, full contract. Be sure to explain your answer.
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- Indicate whether the statement is true or false, and justify your answer.A consumer with declining marginal utility of income will never prefer actuarially fair, partial insurance to actuarially unfair, full insurance.arrow_forwardConsider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U'>0) and convex (U">0).a. Draw a utility function in U–I space that fits this description.b. Explain the connection between U'' and risk aversion.c. True or false: this individual prefers no insurance to (IS, IH) to an actuarially fair, full contract.arrow_forwardIndividuals will prefer to fully insure against a potential adverse event if A. individuals are risk-loving and insurance is priced at an actuarially fair rate. B. individuals are risk-averse and insurance is priced at an actuarially fair rate. C. individuals are risk-loving and insurance is priced above the actuarially fair rate. D. individuals are risk-averse and insurance is priced above the actuarially fair rate.arrow_forward
- The difference between the actuarily fair price for insurance and the price a risk-averse individual is willing to pay to fully insure is called a-insurance benefit b-risk aversion c-the risk premium d-risk profitarrow_forwardSuppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays healthy and will earn $500,000. Suppose further that his utility function is the following (utility = square root of income) Malik is risk ____. He will prefer ____ (given the same expected income). a. lover; actuarially fair and full insurance to no insurance b. averse; no insurance to actuarially fair and full insurance c. neutral; he will be indifferent between actuarially fair and full insurance to no insurance d. lover; no insurance to actuarially fair and full insurance e. averse; actuarially fair and full insurance to no insurancearrow_forwardTess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function c. Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. 1. Suppose the actuarially fair premium charge is 2600, Calculate Tess’ expected utility with full insurance if she is charged the premium. Round to two decimal places. 2. What is the premium that private insurance companies will charge for full insurance? Round to two decimal places. 3.Assume the social welfare function is the sum of the Tess’ and Lex’s utility functions. Select the correct statement regarding the explanation for what has happened in the private market and the role of social insurance. a.Adverse section has lead to market failure. The government could improve social welfare by…arrow_forward
- . Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) √x . 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. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.arrow_forward. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. 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. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) 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?arrow_forwardExplain how risk aversion makes a market for insurance possiblearrow_forward
- Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x . 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. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explainarrow_forward. 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. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.arrow_forwardDraw a graph with utility on the Y axis and income on the X axis for a risk averse person. Label the following points on the Y axis The expected value of utility while uninsured The expected value of utility with actuarially fair, full insurance The expected value of utility with actuarially far, partial insurancearrow_forward
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