What are the expected loss and risk premium

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Reference no: EM131095025

Suppose an individual has the following utility function defined over wealth: U = U(√wealth). The individual has an initial wealth level of $20,000.

A new drug has been developed that is effective in preventing heart attacks. Taking the drug reduces the chance of a heart attack to 10%, but the loss associated with the attack increases to $10,000.

a) What is the expected loss?

b) What is the maximum amount this individual is willing to pay for insurance against a heart attack?

c) What is the risk premium?

Reference no: EM131095025

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