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Problem: Suppose that you have an income of $25,000 per year. With a 30% probability, your daughter will need braces which cost $10,000 out of pocket. Your utility function is given by U= square root C, where C is consumption spending on all goods.
Required:
a. What would the actuarially fair insurance premium be for a dental insurance that covers the full cost of braces?
b. What is your expected utility if you buy the insurance in part A? Please round to the nearest three decimal places.
c. What is your expected utility without insurance? Please round to the nearest three decimal places.
d. What is the maximum amount you would be willing to pay for the insurance in part A given the utility function above?
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