The Baker family is faced with two possible states.In state 1, they remain healthy and incur no medical expenses.In state 2, their medical expenses will be $8,000.There is a 30% chance that state 1 will occur and a 70% chance that state 2 will occur.An insurance company offers to pay all of their medical expenses for a premium of $6,000.From the Bakers' point of view, this is a fair insurance policy.True
Jill is a risk-averse expected-utility maximizer.Jack offers her the following bet: he will toss a coin and pay her $5 if it comes down heads, but if it comes down tails, Jill will have to pay him
$5.Even though heads and tails are equally likely, Jill will not take the bet.False

Question

Quizplus · Accepted Answer

Jill would only take the bet if the expected utility of taking the bet is greater than the expected utility of not taking the bet. In this case, the expected utility of taking the bet is (0.5 x $5) - (0.5 x $5) = $0, which is equal to the expected utility of not taking the bet. Therefore, she is indifferent to taking the bet and would not necessarily refuse it.

The Baker Family Is Faced with Two Possible States