Income in different states of the world | ||||
|---|---|---|---|---|
$0 in medical expenses (0.5 probability) | $10,000 in medical expenses (0.5 probability) | Expected value of income available for consumption | Expected utility | |
Without insurance | $30,000 | $20,000 | (0.5 × $30,000) + (0.5 × $20,000) = $25,000 | (0.5 × 1,080 utils) + (0.5 × 920 utils) = 1,000 utils |
With fair insurance | $25,000 | $25,000 | (0.5 × $25,000) + (0.5 × $25,000) = $25,000 | (0.5 × 1,025 utils) + (0.5 × 1,025 utils) = 1,025 utils |