Question: Mr Banda Phiri has the following utility function U= Y, where Y is Mr Phiri's wealth. Assume Phiri faces a risk p of being

Mr Banda Phiri has the following utility function U= Y, where Y

Mr Banda Phiri has the following utility function U= Y, where Y is Mr Phiri's wealth. Assume Phiri faces a risk p of being sick, where p = 0.1. In addition, assume Phiri's initial wealth is K100,000, but when he gets sick, it falls to K64,000, furthermore Phiri spends K14 000 on medical expenses: a. What is Phiri's actuarially fair premium? [2 marks] b. Is Phiri risk averse or a risk lover? Justify your answer? c. Calculate Phiri's expected wealth with no insurance? [2 marks] d. Calculate Phiri's expected utility with no insurance? [2 marks] e. Calculate Phiri's expected wealth with insurance? [2 marks] f. Calculate Phiri's expected utility with insurance? [2 marks] e. What is that maximum premium Phiri would be willing to pay to shed the risk? [3 marks]

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