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Mike has a utility function U(W)=ln(W), and his initial wealth is $10,000. Mike faces the following probability distributions of losses with respect to his wealth:
Mike has a utility function U(W)=ln(W), and his initial wealth is $10,000. Mike faces the following probability distributions of losses with respect to his wealth: Probability Loss amount 80% 0 10% $1,000 10% $10,000 An insurance firm is willing to offer Mike the following two insurance policies. Which one should Mike choose, if he aims to maximize utility? Policy A fully covers all losses for a premium of $1,200; Policy B covers all losses with a deductible of $1,000 for a premium of $900.
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