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Suppose Elmira has a wealth of $45,000 and that she might incur a loss of $10,000 due to hospitalization. The probability that she will be hospitalized is 1%. Humana healthcare group offers her a health insurance policy with the following terms: to purchase K dollars of insurance benefit, she has to pay K as a premium where 0<<1. If the insurance company is competitive and Elmira is risk-averse, how much of insurance benefit will Elmira buy? How much does she pay as a premium?
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