What is your expected income after paying for illness

Reference no: EM131677925

Instructions - All graphs must be entitled Fig. 1, Fig. 2, etc., and as you writeyou should refer to these graphs by their titles. Draw BIG graphs to improveclarity.

a) Imagine a world where you are considering buying health insurance:

Probability of being healthy = 90%

Probability of getting the flu = 8%

Probability of getting pneumonia = 2%

(You can only have one of the above)

Income = $50,000

Cost of flu = $500

Cost of pneumonia = $5000

What is your expected income after paying for illness?

b) Utility = √(Income) (NOTE: This is square root of income)

Fill in the utility in the following table

Income	Utility
$0
$45,000
$49.500
$52,000

Draw the utility curve including each of those points.

c) If insurance costs $100 and covers the entire cost of each illness, what is the utility benefit (increase in utility) of buying insurance? (Note: round to 3 decimals)

d) What is the premium where you would be equally well off buying or not buying insurance?

Reference no: EM131677925

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