Question

In Problem 3-37, you helped the medical professionals analyze their decision using expected monetary value as the decision criterion. This group has also assessed their utility for money: U(–$ 45,000) = 0, U(–$ 40,000) = 0.1, U(–$ 5,000) = 0.7, U($ 0)= 0.9, U($95,000) = 0.99, a n d U($100,000) = 1. Use expected utility as the decision criterion, and determine the best decision for the medical professionals. Are the medical professionals risk seekers or risk avoiders?
In Problem 3- 37, The Long Island Life Insurance Company sells a term life insurance policy. If the policy holder dies during the term of the policy, the company pays $100,000. If the person does not die, the company pays out nothing and there is no further value to the policy. The company uses actuarial tables to determine the probability that a person with certain characteristics will die during the coming year. For a particular individual, it is determined that there is a 0.001 chance that the person will die in the next year and a 0.999 chance that the person will live and the company will pay out nothing. The cost of this policy is $ 200 per year. Based on the EMV criterion, should the individual buy this insurance policy?



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  • CreatedMay 15, 2014
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