Question 3The current disposable income of Joe is $90,000. Suppose that there is a 1 percent chance that his house may burn down, and if it does, the cost of repairing it will be $80,000, reducing his disposable income to $10,000. Suppose, too, that Joe's utility function is

U(w)= w

Where w is the initial wealth of the

(a) Would he be willing to spend $500 to purchase an insurance policy that fully insures him against his loss?

(b) What is the highest price that he would be willing to pay for an insurance policy that fully insures him if his house burns down?