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Suppose Kareena’s utility function is u=(y/1000)1/2. Her initial income when healthy is 36,000. However, there is a 50% chance that she will face financial loss on being taken ill and the income is likely to reduce by 20,000. (a) Find the expected value of her income. (b) What expected utility she will have given the possible state of her health? (c ) What is the risk premium she will be willing to pay to cover the risk of sickness?
22nd January, 2014