Calculate the actuarially fair insurance premium

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Reference no: EM131385570

Olivia has a utility function is U = (Y)1/2where Y is her income in any given year. Next year, she anticipates her income will be Y=100. However, there is a 25% probability that she will be hit with a significant negative income shock such that her income will be Y=65.

a. What is Olivia’s expected utility?

b. Olivia is considering insuring against the possible income loss. Calculate the actuarially fair insurance premium.

c. What is the most she would be willing to pay for insurance, given her utility function?

d. Is she risk averse? Explain why, why not?

Reference no: EM131385570

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