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Let us assume that the utility function of an individual is given as U(x)= log10(x)....

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Finance

Let us assume that the utility function of an individual is given as U(x)= log10(x). The individual has a yearly income of $100,000. With probability 0.01, the individual can be detected with an illness which can cost $90,000 per year. In order to avoid such a huge cost, the individual prefers to get an insurance. What will be the fair premium and the maximum premium that the individual is willing to pay? What will be the risk premium in this case?

A

Fair Premium: $900 per year, Maximum premium that can be charged: $2000, Risk Premium: $1100

B

Fair Premium: $900 per year, Maximum premium that can be charged: $1000, Risk Premium: $100

C

Fair Premium: $2276 per year, Maximum premium that can be charged: $900, Risk Premium: $1376

D

Fair Premium: $900 per year, Maximum premium that can be charged: $2276, Risk Premium: $1376

E

Fair Premium: $2000 per year, Maximum premium that can be charged: $900, Risk Premium: $1100

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