Ann purchases insurance against damage to her phone wires at 45 cent a month, even though the probability that she incurs a repair cost of $60 is only 0.4%. Is such behaviour consistent with the rational behaviour (it means, does it yield the highest payoff for Ann between the two choices), given that Ann's utility function is u = ? w, and w = 60 is her initial wealth? What if her wealth is w = 70?

Suppose that Bob's wealth is w = 60 and that his utility function is u = w 1 3 . Suppose that he also purchases the same insurance. Is his purchase of insurance consistent with rational behaviour? Compare your answer, assuming w = 60, with Ann's utility, and explain the difference.