Reference no: EM132461955

Suppose an individual makes $50,000 of income per year. Her utility function is given by u=10x^0.5, where x is her income minus expenses. She realizes that there is about a 5% probability that she may suffer a heart attack in any given year. The cost of treatment will be $40,000 if a heart attack occurs.

She has the option of buying health insurance, which will cover all expenses in case of a heart attack. What is the maximal amount she is willing to pay for health insurance?

She has the option of buying health insurance for $2,000 per year, which will cover all expenses in case of a heart attack. Should she buy this health insurance?

(Note: x^0.5 is a different way of writing the square root of x)

Round all answers (also intermediate answers to 2 decimals).