2. Two individuals have the same income ($100,000), but different potential heaithcare expenses. Person A's probability of having $80,000 in healthcare expenses is 0.5 percent. Person B's probability of having $800 in healthcare expenses is 50 percent. Assume your utility is U = VI where I is your income. Calculate each person's expected income and expected utility. Calculate each person's certainty equivalent. What does value of the certainty equivalent tell you about how much each person would be willing to insure against their loss?
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- Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.ease use utility of wealth function in the booK, 8-1 (see below). Certainty Utility B D 200 198 194 D' Total utility 170 of wealth C' Expected Utility A 140 10,000 15,000 19,000 20,000 Wealth FIGURE 8-1 Total Utility of Wealth and the Impact of Insurance Please explain the difference between the certainty utility line and the expected utility line b. Calculate your E(U), given an 80% change of being healthy and 20% of being sick, knowing that your income falls to $10,000 and your utility is 140 if you get sick. Calculate your E(W), given an 80% change of being healthy and 20% of being sick. d. Given that your Certainty Utility Function is U = 200Y-0.00154 and Y is your income, what is your Certainty Utility with insurance (if you are risk averse) What insurance premium will you pay to guarantee a utility of 197? Please provide a calculation.9. Comparing policies Shopping for Life Insurance Suppose Kim has determined that a $100,000 universal life insurance policy would best suit her needs. Tina Trustworthy, a local life insurance agent, quoted her a monthly rate of $300. She remembers learning from her personal finance course that premiums for similar policies, so she plans to Before doing anything else, she decides to consult her Uncle Jim, an attorney, about the features of his life insurance policy. He tells Kim that he has a 10-year $200,000 term life policy. Tina Trustworthy is the second life insurance agent Kim consulted. The first agent she saw was David Dishonestman. Kim began to suspect that rather than trying to serve her best interests, David Dishonestman was primarily interested in earning as high a commission as possible. Which of the following behaviors would have raised Kim's suspicions? Check all that apply. O David Dishonestman described a policy with a high rate of interest, but it had to be purchased…
- and you have a 10% chance of getting sick. Your income when sick is $0 and your income when healthy is $100. 1. Assume your utility over income is U=T ¥ 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…1. 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 £10,00 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?Adam presently makes about $40,000 of interest income per year. He realizes that there is about a 5 percent probability that he may suffer a heart attack. The cost of treatment will be about $20,000 if a heart attack occurs. A. Calculate Adam's expected utility level without any health insurance coverage. B. Calculate Adam's expected income without any insurance coverage. C. Suppose Adam must pay a premium of $1,500 for health insurance coverage with BlueCross Blue Shields insurance. Would he buy the health insurance? Why or why not?
- An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables shows the utility derived from certain amounts of income: Income Utility40,000 20037,000 19535,000 19030,000 17020,000 14010,000 100Considering the probability of illness, what is the expected utility of income without insurance? Show your work.What is an actuarially fair insurance policy?1) to avoid an accident at work or not exert any effort (e John is deciding whether to exert effort (e = 0). If e = 1, the probability of an accident is 0.5. If e = 0, the probability of an accident is 1. John's income without the accident is $100. In case of an accident, medical expenses will be $64. John utility of income is VI. The cost of effort, C(e), is 0 if effort is e = 0 and 1 if effort is e = 1. John's utility function is u(I, e) = Vī – C(e). (a) What are the expected utility values that John would face when he exerts effort and when he does not exert effort? Based on your calculations, should he exert effort? Briefly explain the intuition behind his decision in one or two sentences. Now suppose there is a risk neutral insurance company. Suppose the insurance company cannot monitor whether John exerts effort or not. The insurance company considers two plan contracts. Contract Plan A: Premium: p = $36. Payout in the event of accident: d = $64 Contract Plan B: Premium: p = $19.…
- Michael lives on an island and owns a beach house worth $400,000. Of that, $100,000 is the cost of land and $300,000 is the cost of the structure. The probability that a hurricane destroys his house is 3percent (he will still own the land). Michael can purchase hurricane insurance at the price of $2for each $100 of coverage. 1. What is Michael’s contingent consumption bundle if Michael does not purchase insurancefor remain uninsured? S. Amanda has a utility of money function of u(w)-w4, Her initial wealth is w-$20,000 and she faces a .10 probability of a loss L $5,000; with probability 9 she suffers no loss. Calculate the amount of insurance Amanda will purchase if $1 of coverage costs $.10 per dollar of coverage. Would purchase any insurance if the cost per dollar of coverage was $.20.Nathan's income in a typical year is 75,000. There is a 10 percent chance that Nathan will be seriously ill next year, incurring 15,000 in medical expenses. Samantha also earns 75,000 in a typical year. Her chance of becoming seriously ill next year and incurring ur 15,000 in medical expenses is 20 percent. a. Calculate the actuarially fair premium for full insurance for (i) Nathan and (ii) Samantha. b. Suppose that a private insurance firm cannot distinguish between Nathan and Samantha in terms of their risk and assumes the risk of being seriously ill in the general population is 10%. In this context, discuss the adverse selection problem the firm might face. c. Can a compulsory, government - run health insurance program avoid the problem of adverse selection? Explain why or why not.