Suppose that you have a job paying 50 000 per year
Suppose that you have a job paying $50,000 per year. With a 5% probability, next year your wage will be reduced to $20,000 for the year.
a. What is your expected income next year?
b. Suppose that you could insure yourself against the risk of reduced consumption next year. What would the actuarially fair insurance premium be?
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