Answer to Question #91527 in Microeconomics for Ida

Question

An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables show the utility derived from certain amounts of income:

Income Utility
40,000 200
37,000 195
35,000 190
30,000 170
20,000 140
10,000 100
A. Is this person risk neutral, risk-loving or risk averse? Why?
B. Considering the probability of illness, what is the expected income without insurance?

Answer 1

A: risk averse. Because the law of decreasing MU is true for this case

B: E(I) = 0.9*40 000 + 0.1*(40000-30000) = 37 000