Background for questions 1-4: All houses in the city of Macondo are made of wood. A typical Macondo resident values their house at 50,000. During
Background for questions 1-4: All houses in the city of Macondo are made of wood. A typical Macondo resident values their house at 50,000. During a severe dry season, it is estimated that there is 20% probability that a house would catch fire. When a house burns down, its value falls to 5,000, since extensive reparations will be needed. Citizens of Macondo, all of which are homeowners, can incur a cost of 5,000 each and paint their houses in fire resistant paint. By doing this, the likelihood of a house burning down falls to 10%. Assume that citizens of Macondo do not have another source of wealth; and their utility is given by u(w) = /w. 2. What is the expected utility of a resident who uses the fire resistant paint
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