Calculate her expected utility

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Reference no: EM131095427

Suppose that individual A’s utility function, which only depends on wealth (W), is defined asU(W) = W^0.5 ,where W stands for her/his wealth.

Based on this utility function, answer the following questions:

a) Suppose her/his initial wealth is $10,000, and there is a 20% chance that she may get sick. In the event of illness, the cost of medical care is $1,000. Given this information, calculate her/his expected utility.

b) In order to cover potential cost due to future cost of care, individual can buy full insurance. If health insurance is available for her/his with a premium of $100, will she buy insurance? Explain and show your work.

c) What is the maximum amount of insurance premium that she is willing to pay? Explain and show your work.

Reference no: EM131095427

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