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Helen owns a farm with 20 sheep, each worth 100, and has no other current income/financial assets. She is an expected utility maximizer with a
Helen owns a farm with 20 sheep, each worth 100, and has no other current income/financial assets. She is an expected utility maximizer with a utility function over outcomes z (measured in money in ) given by u(z) = 100 ln(z). With a probability of 20 percent, a wolf attacks her sheep, and kills 2 of them. So you can model her situation as a lottery where she has, with 80 percent probability a wealth of 20100 and with 20 percent 18100. Suppose an insurance company offers a "wolf insurance". If Helen buys this, she needs to pay p, but receives the value of 2 sheep in case of a wolf attack. What is the maximal price p she is willing to pay for this insurance? Round to one decimal
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