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A consumer who obeys the von Neumann-Morgenstern axioms and has an initial wealth of $160,000 is subject to a fire risk. There is a 0.05
A consumer who obeys the von Neumann-Morgenstern axioms and has an initial wealth of $160,000 is subject to a fire risk. There is a 0.05 probability of a major fire with a loss of $70,000 and a 0.05 probability of a disastrous fire with a loss of $120,000. Her utility function is U(W) = W. She is offered an insurance policy with the deductability provision that she bears the first $7620 of any fire loss. What is the maximum premium that she would be willing to pay for this policy?
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