1. The value of insurance Suppose you face a choice between a certain income of
ID: 1160197 • Letter: 1
Question
1. The value of insurance Suppose you face a choice between a certain income of $3,000, or a 50-50 chance of income of $1,500 or $4,500. Suppose you prefer the 50-50 chance of $1,500 or $4,500. True or False: You are risk averse. True False Suppose that a disease affects 4% of the population and that ev do not prefer y likely to get the disease. Treatment for this disease costs $36,000. Assume that this disease, and necessary treatment, represent th re costs in this population. prefer The expected cost of healthcare is $ take on the 4% risk of having to pay the full cost of the treatment, they are risk averse. . If people to pay the expected cost of healthcare with certainty, rather thanExplanation / Answer
If someone chooses certain Income over Lottery that carries risk then he is risk averse, if he is indifferent between both of these choices then risk neutral and otherwise risk loving
Hence as our agent has chosen lottery over certaini income he is not risk averse for sure
Answer is False
if 4% chances of disease and hence the healthcare cost (disease cost) of $36,000 then expected cost of healthcare is $1440 and if pepole prefer to pay expected cost then they are risk averse otherwise risk lover
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