Health Economics
14th Edition
ISBN: 9781137029966
Author: Jay Bhattacharya
Publisher: SPRINGER NATURE CUSTOMER SERVICE
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 1E
To determine
Determine whether the given statement is true or false.
Expert Solution & Answer
Explanation of Solution
According to the simple model, the income utility curve is determined by an individual’s taste for risk. If an individual exhibits the declining
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Draw a utility function over income u( I) that describes a man who is a risk lover when his income is low but risk averse when his income is high. Can you explain why such a utility function might reasonably describe a person’s preferences?
Can you explain how Constant Relative Risk Aversion utility function should be understood and how it works mathematically
Economists define the 'certainty equivalent' of a risky stream of income as the amount of guaranteed money an
individual would accept instead of taking a risk. The certainty equivalent varies between individuals based on their risk
preference. Consider a risky bet that involves a 50-50 chance of losing $5,000 or winning $5,000 for an individual with
starting income of $50,000. Calculate the certainty equivalent income that provides the same utility as this bet for
individuals with these different utility functions: a. U(1) Vi b. U(1) = In(1) where In represents the natural logarithm
function C. U(I) = -1/1 d. What can you conclude about the relative level of risk aversion for these three individuals? e
What would be the certainty equivalent income for this bet for a risk neutral individual? f. What is the likelihood that a
profit maximizing risk neutral insurance company would be willing and able to purchase these bets from the individuals
in a, b and c? Explain.
Knowledge Booster
Similar questions
- Suppose that a person's utility function is the square root of wealth. Suppose the person earns $100,000 per year. He or she has an illness with a probability of 0.2, and the cost of the treatment is $30,000. Would the person pay $6,000 for insurance? Why or why not? What is the most this person would pay to be insured (hint: equate expected utility to utility with certainty)? Suppose their utility function changed to wealth squared (hint: are they now risk averse?). Would they pay $6,000 for insurance? Why or why not?arrow_forwardThe lecture mentions that diminishing marginal utility applies to the consumption of money as well as the consumption of certain food. Can you give another example where diminishing marginal utility applies? Can you think of any example where diminishing marginal utility does not apply? From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance? One of the predictions of prospect theory is that we tend to be overly concerned with relatively small risk. Can you think of any example (besides those given in the lecture) that either speaks to this or is an exception?arrow_forwardQuestion 5 Suppose that there is a 10% chance Ja'Marr is sick and earns $10,000, and a 90% chance he is healthy and will earn $70,000. Suppose further that his utility function is the following (utility = square root of income) U (I) = VIncome Ja'Marr's utility from expected income is , and his expected utility of his income is 264.58; 100 248.12; 252.98 100; 265.58 252.98; 248.12arrow_forward
- Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?arrow_forwardEconomists define the ‘certainty equivalent’ of a risky stream of income as the amount of guaranteed money an individual would accept instead of taking a risk. The certainty equivalent varies between individuals based on their risk preference. Consider a risky bet that involves a 25% chance of losing $5,000 or a 75% winning $5,000 for an individual with starting income of $50,000. Calculate the certainty equivalent income that provides the same utility as this bet for individuals with these different utility functions: 1. U(I) = I 2. U(I) = I–√ 3. U(I) = ln(I)where ln represents the natural logarithm function Type the numerical answers in the corresponding numbered boxes below. Round your answers to two decimal places. Do not use $ or , in your answers. (for example, enter 45223.45 or 46500.00) What can you conclude about the relative level of risk aversion for these three individuals? Explain.arrow_forwardIn the field of financial management, it has been observed that there is a trade-off between the rate of return that one earns on investments and the amount of risk that one must bear to earn that return. a) Draw a set of indifference curves between risk and return for a person that is risk-averse (a person that does not like risk).arrow_forward
- Consider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U’ > 0) and convex (U’’ > 0). a) Draw a utility function in U - I space that fits this description. b) Explain the connection between U’’ and risk aversion.arrow_forwardConsider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U’ > 0) and convex (U” > 0). Draw a utility function in U - I space that fits this description. Explain the connection between U” and risk aversion. True or false: this individual prefers no insurance to an actuarially fair, full contract. Be sure to explain your answer.arrow_forwardConsider an individual whose utility function over income I is U(I), where U is increasing smoothly in I (U'>0) and convex (U">0).a. Draw a utility function in U–I space that fits this description.b. Explain the connection between U'' and risk aversion.c. True or false: this individual prefers no insurance to (IS, IH) to an actuarially fair, full contract.arrow_forward
- Which of the following shapes is the most likely plot of the utility-of-wealth function for a risk-averse person? Utility OA B D B D A Wealth Carrow_forward4. An individual's Bernoulli utility function is u(w) = Vw, and the individual has initial wealth 100. The individual might develop a health problem, which would reduce his or her wealth to 0. The individual might be "healthy" or "unhealthy." A healthy person develops the health problem with probability qL = 0.3, while an unhealthy person develops the health problem with probability qH = 0.7. The probability that the individual in question is healthy is 1/2. An individual knows whether he or she is healthy, but an insurer does not. Without insurance, a healthy person's wealth is 100 with probability 0.7 and 0 with probability 0.3. Without insurance, an unhealthy person's wealth is 100 with probability 0.3 and 0 with probability 0.7. Insurers only offer "full insurance." That is, if the adverse event occurs, they will pay back 100, restoring the individual's full wealth. Insurers set a price for this policy that is "actuarially fair." Insurance company makes no money on average.…arrow_forwardQuestion 3: Jane has utility function over her net income U(Y)=Y2 a. What are Jane's preferences towards risk? Is she risk averse, risk neutral or risk loving? [Briefly explain your answer] b. Jane drives to work every day and she spends a lot of money on parking meters. She is considering of cheating and not paying for the parking. However, she knows that there is a 1/4 probability of being caught on a given day if she cheats, and that the cost of the ticket is $36. Her daily income is $100. What is the maximum amount of she will be willing to pay for one day parking? c. Paul also faces the same dilemma every single day. However, he has a utility function U(Y)-Y. His daily income is also $100. What is Paul's preference towards risk? Is he risk averse, risk neutral or risk loving? d. If the price of one day parking is $9.25, will Paul cheat or pay the parking meter? Will Jane cheat or pay the parking meter?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education