Suppose there is a 50-50 chance that a risk-averse individual with a current wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000. a. Calculate the cost of actuarially...

Suppose there is a 50-50 chance that a risk-averse

individual with a current wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000.

a. Calculate the cost of actuarially fair insurance

in this situation and use a utility-of-income

graph (Figure 4.2) to show that the individual

will prefer fair insurance against this loss to

accepting the gamble uninsured.

b. Suppose two types of insurance policies were

available: