advanced finance

You run a firm worth $100000. You face some risk of having a fire that would reduce your net worth according to the following three states, i=1,2,3, each with probability ( i) (Scenario A). Note that in state 3 , nothing detrimental happens, and your business retains its value of $100000. a. What is the maximum amount you will pay for insurance if you have a logarithmic utility function over final wealth? (Note: The insurance pays $99999 in the first case; $50000 in the second; and nothing in the third.) b. Do the calculations with the following alternative probabilities: Is the outcome (the comparative change in the premium) a surprise? Why? You run a firm worth $100000. You face some risk of having a fire that would reduce your net worth according to the following three states, i=1,2,3, each with probability ( i) (Scenario A). Note that in state 3 , nothing detrimental happens, and your business retains its value of $100000. a. What is the maximum amount you will pay for insurance if you have a logarithmic utility function over final wealth? (Note: The insurance pays $99999 in the first case; $50000 in the second; and nothing in the third.) b. Do the calculations with the following alternative probabilities: Is the outcome (the comparative change in the premium) a surprise? Why