3.3 Angus bought a £3,500 home theater system and is considering purchasing an extended warranty to insure it fully against defects for an additional three years. If the probability that his system will malfunction during the extended period is 5%, his utility function is U(W) = 2W0.5, and the cost of the insurance is £200.

a. Is the store offering a fair insurance policy?

b. Should he buy the store’s insurance?

c. What would be the most he would be willing for the insurance? M