If an individual faces a 3% chance of requiring a surgery that costs $10,000 then a risk-averse person would be willing to pay ____________ per year for health insurance that would cover the cost of the surgery if the shock hits.

Question

Quizplus · Accepted Answer

A risk-averse person values the security of insurance more than the expected cost of the risk itself. The expected cost of the surgery is 3% of $10,000, which is $300. A risk-averse individual would be willing to pay more than the expected cost ($300) to avoid the risk of having to pay the full $10,000 if the surgery is needed.

If an Individual Faces a 3% Chance of Requiring a Surgery