QUESTION 7
Susan is considering whether to buy health insurance. Her utility is given by , where I is her yearly income equal to $81,000. However, there is a 3% chance that she’ll fall sick with a flu virus, which will cost her $10,000.
What is the expected utility of not buying any insurance? (round your answer to the nearest two decimal places)
What is the actuarially fair premium for full health insurance in this case?
What is her expected utility from buying full and fair insurance? (round to the nearest 2 decimals places)
QUESTION 10
Assume that the flu is the only likely health expenditure that Susan would face. If the cost of the flu shot is $500 and the flu shot reduces the probability that she gets the flu to 1%, should she choose the insurance or the flu shot? Fully justify your answer by showing your calculations.
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