Essay
Suppose, after undergoing genetic testing, you discover that you have a health condition that could result in the emergence of a disability which would make it impossible for you to continue to work.The probability of this happening is 50%.Currently your expected lifetime earnings are $5,000,000, but if the disability hits, your expected lifetime earnings will consist primarily of income earned from government support programs -- and will not add up to more than $1 million.
a.Suppose that you are risk averse and your tastes are state-independent.Illustrate your expected utility in a graph with lifetime consumption on the horizontal and utility on the vertical axis.
b.Illustrate how much you would be willing to pay for full insurance.
c.Illustrate what you showed in (b) in a different graph that has consumption in the "good" state on the horizontal and consumption in the "bad" state on the vertical.
d.What would a full menu of actuarily fair insurance contracts look like in your graph from part (c)? Where would you optimize in that graph?
e.Now suppose that you believe consumption will be more meaningful if the health condition does not materialize.What changes in your graph from part (d)?
Correct Answer:

Verified
a. Expected utility is given by B in the...View Answer
Unlock this answer now
Get Access to more Verified Answers free of charge
Correct Answer:
Verified
View Answer
Unlock this answer now
Get Access to more Verified Answers free of charge
Q16: Suppose you rent an apartment and are
Q17: Suppose an individual has state-independent tastes and
Q18: Risk averse individuals will fully insure to
Q19: If the probability of the bad outcome
Q20: The independence axiom implies that if I
Q21: Suppose that individuals with state-independent and risk-averse
Q22: Suppose, after undergoing genetic testing, you discover
Q24: When tastes are risk averse, an individual
Q25: Gamble A results in $10 with probability
Q26: Two related ways to quantify a person's