Question

A consumer has wealth W = $100 and faces a 50% probability that he will require a surgical procedure which costs $64. He behaves as if he maximizes his expected utility and his utility function is: U(W) = ?W a) Sketch a graph showing the utility function, the consumer's wealth when he does and does not need surgery, and expected utility as the probability of needing surgery varies between zero and one. [Upload your response as an attachment.] (4 Marks) b) What is the expected loss the consumer faces? Calculate, and indicate on your graph. (4 Marks) c) What is the maximum price he would pay for full insurance? Calculate, and indicate on your graph. (4 Marks) d) A competitive (hence, zero profit), zero cost insurance industry provides only full insurance contracts. What is the equilibrium price for full insurance? (4 Marks) e) Are consumers better off due to the existence of insurance? Briefly explain. (4 Marks)

          A consumer has wealth W = $100 and faces a 50% probability that he will require a surgical procedure which costs $64. He behaves as if he maximizes his expected utility and his utility function is: U(W) = ?W a) Sketch a graph showing the utility function, the consumer's wealth when he does and does not need surgery, and expected utility as the probability of needing surgery varies between zero and one. [Upload your response as an attachment.] (4 Marks) b) What is the expected loss the consumer faces? Calculate, and indicate on your graph. (4 Marks) c) What is the maximum price he would pay for full insurance? Calculate, and indicate on your graph. (4 Marks) d) A competitive (hence, zero profit), zero cost insurance industry provides only full insurance contracts. What is the equilibrium price for full insurance? (4 Marks) e) Are consumers better off due to the existence of insurance? Briefly explain. (4 Marks)

A consumer has wealth W = 100 and faces a 50% probability that he will require a surgical procedure which costs $64. He behaves as if he maximizes his expected utility and his utility function is: U(W) = ?W a) Sketch a graph showing the utility function, the consumer's wealth when he does and does not need surgery, and expected utility as the probability of needing surgery varies between zero and one. [Upload your response as an attachment.] (4 Marks) b) What is the expected loss the consumer faces? Calculate, and indicate on your graph. (4 Marks) c) What is the maximum price he would pay for full insurance? Calculate, and indicate on your graph. (4 Marks) d) A competitive (hence, zero profit), zero cost insurance industry provides only full insurance contracts. What is the equilibrium price for full insurance? (4 Marks) e) Are consumers better off due to the existence of insurance? Briefly explain. (4 Marks)

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