QUESTION 3 This question pertains to how individuals deal with risky situations and interact with others in similar situations to mitigate risk. Suppose you invest in a business with risky returns: With probability 0.6 you have good luck and earn $14,400 With probability 0.4 you have bad luck and earn $6,400. Suppose your friend has a sure income of $14,400. She offers to provide you with an insurance contract: If you have good luck you pay her $x If you have bad luck she makes you a payment so that your income is $10,000 Both of you have Utility from income: U(1) = VI a) What is the minimum value of x (to the nearest dollar) such that your friend will provide you with insurance? (Hint: think about your friend's expected utility.) b) What is the maximum value of x (to the nearest dollar) for which you will accept your friend's offer? (Hint: think about your expected utility.) QUESTION 3 This question pertains to how individuals deal with risky situations and interact with others in similar situations to mitigate risk. Suppose you invest in a business with risky returns: With probability 0.6 you have good luck and earn $14,400 With probability 0.4 you have bad luck and earn $6,400. Suppose your friend has a sure income of $14,400. She offers to provide you with an insurance contract: If you have good luck you pay her $x If you have bad luck she makes you a payment so that your income is $10,000 Both of you have Utility from income: U(1) = VI a) What is the minimum value of x (to the nearest dollar) such that your friend will provide you with insurance? (Hint: think about your friend's expected utility.) b) What is the maximum value of x (to the nearest dollar) for which you will accept your friend's offer? (Hint: think about your expected utility.)