QUESTION 4 Mrs. Obaatanpa has a wealth of Ghe 3,500 for one year. There is a 35% probability that she get sick and she estimates her loss from the illness to be Ghe 1,600. Her utility function is given as U(Y) = √Y, where Y is the amount of wealth she has. a) Comment on her utility function. Is she risk-neutral? b) Estimate the risk that she faces and explain. c) What is her expected utility? d) Suppose that she can buy an insurance policy that will cover the entire loss, what is the maximum premium she would be willing to pay?

QUESTION 4 Mrs. Obaatanpa has a wealth of Ghe 3,500 for one year. There is a 35% probability that she get sick and she estimates her loss from the illness to be Ghe 1,600. Her utility function is given as U(Y) = √Y, where Y is the amount of wealth she has. a) Comment on her utility function. Is she risk-neutral? b) Estimate the risk that she faces and explain. c) What is her expected utility? d) Suppose that she can buy an insurance policy that will cover the entire loss, what is the maximum premium she would be willing to pay?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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