A family's wealth w has utility u(w) = w1=2 and the family has V NM utility relative to choices

under uncertainty. The family's initial wealth is w1 = 100 and there is a p = 50% probability

of a damage L = 64, which would reduce wealth to w2 = 36.

8 (a) Determine the expected value E(w) of the family's wealth without insurance.

8 (b) Determine the expected utility of the lottery describing the two possible wealths of the

family if no insurance is purchased.

9 (c) Determine the maximum price P the family is ready to pay for complete insurance, and

the associated risk avoidance price R i.e. benet from elimination of risk, and show that

P=d+R (where d is the expected value of the damage reimbursement with complete insur-

ance)