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I am planning a ski trip on which I plan to spend $5,000. The utility from the trip is a function of how much I
I am planning a ski trip on which I plan to spend $5,000. The utility from the trip is a function of how much I actually spend on it, Y, given by u(Y) = ln(Y). (a) If there is a 20% chance that I will lose $1000 of my available spending money on the trip, what is the trip's expected utility? (b) Suppose that I can buy insurance against losing the $1000 at an actuarially fair premium of .20($1000)=$200. Show that my expected utility is higher if I purchase this insurance than if I take the risk. (c) Would I buy full insurance (i.e. insurance that pays $1000 if loss occurs) at a price of $250? ((1) What is the maximum amount that I am willing to pay to fully insure against the $1000 loss? (6) My spouse faces a similar situation: plans to spend $5000, but has a 20% chance of losing $1000. However, he is a riskloving individual with VNM utility captured by u(w) = 102. What is the maximum amount that he would be willing to pay to fully insure against the $1000 loss
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