You have a utility function, U=lnw. Initially your wealth is $10,000. There is a

Question

You have a utility function, U=lnw. Initially your wealth is $10,000. There is a 25% chance of a burglary at your house which would cause you to lose $5,000. a. What is the expected wealth if you do not buy the insurance against this loss? the expected loss? (is it 2,500 as expected loss and initial wealth is 10,000) b. What is the expected utility if you do not buy this insurance? c. what is your utility if you buy insurance against this loss by a premium equal to the expected loss? d. what is the largest premium you would be willing to pay against this possible loss?

Explanation / Answer

Expected value = sum of ( value * probability of occuring of that value)

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