Hey, are you available to solve this in the next 4 hours?
Assume a utility function of U = ln(4I) where I is income and ln is the natural log. Additionally, there are two states: healthy and sick. When healthy, income is $30,000. There is a 5% probability of illness. If ill, the total cost is $20,000.
a. What is the expected income without insurance?
b. What is the expected utility without insurance?
c. How much is an actuarially fair insurance policy?
d. How much above the actuarially fair insurance premium is this person willing to pay (what is the risk premium)?
e. What is the maximum that this person is willing to pay for insurance?