1) Consider the country general store example, where there is a 50% chance a tornado destroys your store. If it does, you earn $36. If it doesn't, you earn $100. U = M^.5. Suppose I offer you insurance that pays you $20 if your store is destroyed, but you pay me $24 if it is not. Do you buy insurance? Will I offer this insurance? Be sure to calculate expected value and expected utility.

2) Suppose the odds and incomes are the same, but now your utility function is U = M^2. Would you take the insurance offered in part 1? What would your certainty equivalent be with these preferences?