Insurance Proposal and Utility Function
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Assume Bob has the following utility function: U = I^0.25
Bob has a 90% probability of being healthy and earning $100,000 and a 10% probability of being unhealthy and earning only $20,000. He is pricing insurance policies in the market to protect his earnings (and thus his family). If Bob can purchase insurance for $11,000 that guarantees he will make $100,000 a year ($89,000 after he pays his premium) even if he suffers from a bad health event, should he do it?
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Solution Summary
Solution depicts the steps to evaluate the given insurance proposal and checks if it is advisable to purchase.
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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