Mr. Li is planning an around-the-world trip on which he plans to spend $10,000. His utility function is U(S)=S , where S is the actual spending.

(a) If there is a 25% probability that he will lose $1,000 of his cash on the trip, what is the trip's expected utility?

(b) Suppose that Mr. Li can buy insurance against losing the $1,000 at an "actuarially fair" premium of $250.Show that his expected utility is higher with this insurance than without any insurance.

(c) What is the maximum amount that Mr. Li would be willing to pay to insure his $1,000?