Question

Geetha' wealth is £100,000 and her utility function is given by U(X)=Ln(x)/4, where Ln(x) denotes the natural log of wealth.Her wealth contingent on whether she becomes ill or remains healthy are

given by cill and C healthy respectively.She estimates that there is a 20% probability that she will fall ill,resulting in a £60,000 medical cost.She is thinking of insuring against this risk by buying a units of insurance.Each £1 of health insurance costs 30 pence(£0.3),which she has to pay regardless of whether she becomes ill or remain healthy.When answering the questions,consider C healthy to be on the y-axis and Cill on the x-axis.

Fig: 1