Computation of expected utility from health insurance

Reference no: EM1312773

Your utility function is given by U = log(4C), where C is consumption. You make $30,000 per year and enjoy jumping out of perfectly good airplanes. There's a 5% chance that, in the next year, you'll break both legs and will incur medical costs of $15,000 and will lose an additional $5,000 from missing work because of the loss of a working pair of legs for some time.

(a) What is your expected utility without insurance?

(b) Suppose you can buy insurance that will cover the medical expenses but not the foregone part of your salary. How much is an actuarially fair policy, and what is your expected utility if you buy it?

Suppose you can buy insurance that will cover your medical expenses and foregone salary. How much would such a policy be if it's actuarially fair, and what is your expected utility if you buy it?

Reference no: EM1312773

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