Question
Kadie has the following utility function defined over wealth: U (W) = ln (W ) Suppose Kadie's current wealth is $100,000, and there is a
Kadie has the following utility function defined over wealth: U (W) = ln (W ) Suppose Kadie's current wealth is $100,000, and there is a 10% chance of having a car accident that will generate a $30,000 loss. a. What is the maximum Kadie would pay for car insurance to cover the potential loss? Rose, Kadie's twin sister has the following utility function defined over wealth: U(W )=(W)^(1/2) Rose has the same wealth as Kadie. She also has the potential for the same loss and her subjective probability for the loss is the same as Kadie's. b. What is the maximum Rose would pay for car insurance to cover the potential loss? c. What can we say about the level of risk aversion comparing the two siblings?
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