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What property of an individual's utility function is necessary for that individual to be risk-averse?

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Mahe Alam
Mahe AlamLv10
28 Sep 2019
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Related questions

Let W represent an individual's annual earned income and U(W) = (W/10)^0.5 is this individual's Von Neumann-Morgenstern utility index (or utility function). This individual's earned income is $49,000. This individual faces the prospect of a 20% chance of needing healthcare with a price tag of $13,000. Assume this person is risk-averse. Also, assume that the health insurance company has only claim costs and that administrative costs are $0. What is the maximum health insurance premium that this individual is willing to pay?

Evaluate the following statements as true or false. Provide your reasoning:

a) A risk-averse person prefers the expected utility of income of a risky bet to the utility of the expected income of the same bet.

b) A risk-averse person would always take a sure $10 rather than a 10% chance at $100.

c) A risk-averse person has an increasing marginal utility of income (or wealth).

11. In health insurance markets asymmetric information between agents leads to adverse selection. T/F? With an example, explain how asymmetric information in the health insurance context does or does not lead to adverse selection.

17. A fair and partial insurance is more preferable as it maximizes risk-averse individual's utility and decreases overall healthcare costs in the society. T/F? Why?

18. In a pooling equilibrium, the insurance company offers two contracts that result in high-risk and low-risk types choose different contracts. T/F? Why?

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