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QUESTION
If a person with utility from income is U = Y^0.
7. If a person with utility from income is U = Y^0.6 (where Y is income) and an initial income of $40,000 faces the risk of losing all of her income with a likelihood of three percent, what is the most you could charge such a person for full insurance against this risk? And what would actuarially fair insurance cost her? Show work.
The initial income of the person = $40,000The probability that the person lose all his income = 0.6The probability that the person will not lose his income = 0.4The expected loss = 0.6 (40,000)...