Q2). Willingness to Pay for Insurance. Tom Brady has finally decided to quit football, and open a burrito restaurant in Scottsdale. Table 1 shows his projections for the first 5 years of operating profit (in millions of dollars). Although he is a pretty good football player, he is not very good at math, so does not understand how his risk aversion affects the price that he would be willing to pay to insure the stream of profit he expects from his restaurant. Use the data in table 1 to answer the questions that follow (assume all values are in millions of dollars). Table 1. Expected Utility of Profit

Year	Profit	U(Profit)	U(E[profit])
1	2	2.32
2	6	5.01
3	8	6.12
4	5	4.41
5	4	3.77
Average =	5	4.33	4.41

A.) Assume his coefficient of risk aversion is 0.3. Show Tom how this level of risk aversion means that his expected utility of profit differs from this utility of expected profit, and briefly explain the significance for his willingness to bu insurance.

B) Tom is actually thinking of buying business insurance from another retired football player, Brett Favre. Use the concept of certainty equivalence to show how much Tom should pay to insure the income stream above.

C) Ten years down the road, Tom now has 5 more children, so is much more risk averse than he was when he opened the restaurant. If his coefficient of risk aversion is now 0.8, show how his willingness to pay for insurance changes.