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Consider a risk averse agent. He faces a health risk of D(he/she has to go to the hospital and pay D, and he/she will be fine) with probability k. He/she can buy insurance at price q (that is he/she can buy at cost q a contract that pays 1 dollar if he/she has to go to the hospital). How many units of the contract will the agent buy if the price is q=k?

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Solution Summary

The solution applies utility function and summarizes risk aversion.

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If she buys n units of insurance, the utility is
Ui = U(n*1 - nq -D)*k + U(-nq)*(1-k) = ...

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