=a. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes your expected assets after one year.

b. You now have constructed a utility function that measures how much you value having total assets worth x dollars (x 0). This utility function is U(x)= x.

Compare the utility of reducing your total assets next year by the cost of the earthquake insurance with the expected utility next year of not taking the earthquake insurance. Should you take the insurance?