If a patient has a probability of being sick of 0.1 and a probability of being...

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If a patient has a probability of being sick of 0.1 and a probability of being...

If a patient has a probability of being sick of 0.1 and a probability of being healthy of 0.9. If the person has a good health her wealth will be $100, if she has bad health her wealth will be $64. Suppose that the utility of wealth come from the following utility function: U(W)=W^0.5.

The expected utility of the patient if she has no insurance is

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Answer 1

Answer #1

Utility with bad health = 64^0.5 = 8

Utility with good health = 100^0.5 = 10

Expected utility (no insurance) = Probability x Utility = 8 x 0.1 + 0.9 x 10 = 9.8

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Answer 2

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