A homeowner has a home worth $ 300,000, and some financial investments worth $ 100,000. There are no loans against the home, so a decision must be made with respect to buying homeowners insurance to protect against loss by fire. Such a policy would cost $2000/year. Assume the risk of a fire is 0.005 in a year, and if a fire occurs it would be a total loss. There is no deductible (self-participation) when a loss occurs. Assume the homeowners utility of wealth function is given by u(W) = log₁₀(W + 200) where the log function is base 10 (the default for the log function in Excel), and wealth is measured in thousands of dollars. For example, if the wealth is $ 600,000, the utility would be log₁₀(600 + 200) = log₁₀(800) = 2.90309. Question 1. Obtain the Expected Monetary Value (EMV) for this uncertain situation (lottery). Express answer in dollars (not thousands).

Question 2. Using the data in Question 1, obtain the Certainty Equivalent (CE) for the uncertain situation (lottery). Try to obtain an accuracy such that the relevant utility is within 0.0001 relative accuracy (answer value target value)/(target value) is less then 0.0001. You may need to use an iterative procedure here. Express answer in dollars (not thousands).

Question 3. Using your results for Questions 1 and 2, obtain the risk premium (RP) for the uncertain situation (lottery). Express answer in dollars (not thousands).

Now assume the homeowner has decided to buy fire insurance, but has been presented with two options: 1) High premium: premium is $5000, but there is no deductible 2) Low premium: premium is $2000, but the deductible is $30,000. Using relevant data from previous questions, obtain the expected utility values for the two options. Express answers to at least 5 digits after the decimal point. If you enter values into the Canvas question field, separate them by a space.