If you remain healthy, you expect to earn an income of $100,000. If, by contrast, you become disabled, you will only be able to work part time, and your average income will drop to $20,000. Suppose that you believe that there is a 5 percent chance that you could become disabled. Furthermore, your utility function is U = √ I.

If you remain healthy, you expect to earn an income of $100,000. If, by contrast, you become disabled, you will only be able to work part time, and your average income will drop to $20,000. Suppose that you believe that there is a 5 percent chance that you could become disabled. Furthermore, your utility function is U = √ I. What is the most that you would be willing to pay for an insurance policy that fully insures you in the event that you are disabled?

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Related Book For answer-question

Microeconomics

2nd edition

Authors: Douglas Bernheim, Michael Whinston

ISBN: 978-0073375854