Suppose that you have a job paying $60,000 per year. With 30 percent probability, you may get sick and your earnings next year will be reduced to $20,000 for the year. Assume that you spend all of your income on consumption and you have no savings.
(a) Assume that your utility from consumption is given by u(C)=ln(C) and that you want to maximize the expected utility. How much will you consume in each of the two possible states of the world if the insurance is actuarially fairly priced? What is your expected consumption then?
(b) What is the maximum price at which you would still consider buying some insuranc
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