Suppose all individuals have a utility function of U = 2 x C 0.5, where C is the amount of consumption a person has in any given period.

There are two types of people: young and healthy, with a 1% chance of a major medical event, and old and infirm, with a 10% chance of a major medical event.

70% of individuals are young and healthy and 30% are old and infirm. The income of all individuals is $60,000 per year, and a major medical event costs $20,000 in the year of the event.

Consider the market for full insurance

A. calculate the actuarially fair insurance premium for each type of person, assuming the insurance company can identify who is young and healthy and who is old and infirm

B. how much will a young and healthy individual be willing to pay for insurance?

C. how much will an old and infirm individual be willing to pay for insurance ?