A person with a logarithmic utility function and $ 100,000 of wealth insures a car against theft for one year. The value of the car is $ 20,000 and the probability that the car will be stolen is 0.2% .

a) Calculated the certainty equivalent.

b) What is the person's risk premium for car insurance? What is the person's maximum

willingness to pay for car insurance? Illustrate with a graph.

c) Does the logarithmic utility function give a realistic representation of risk aversion?