Priyanka has an income of 90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost 80,000 which would reduce the income to 10,000.

a) Would Priyanka be willing to spend 500 to purchase an insurance policy that would fully insure her against this loss? Explain.

b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?