Sarah's current disposable income is $90,000. Suppose there's a 1% chance that Sarah's house may be flooded, and if it is, the cost of repairing it will be $80,000, reducing her disposable income to E10,000. Suppose also that her utility function of income M is: U - VM (a) Calculate Sarah's expected income and expected utility given the risk of flooding. (2 marks) (b) For her to take an insurance that fully insures her in the event of house flooding, Sarah would have to pay a price for such an insurance, which would reduce her disposable income. What would be the minimum certain disposable income required for Sarah to take an insurance that fully insures her in the event of house flooding? Explain your answer. (2 marks) Question 3 continued overleaf 201 2021/2 A 800 Page 4 (c) Based on your answer to part b), what is the highest price Sarah would be willing to pay for an insurance policy that fully insures her in the event of house flooding? Explain your answer. (1 mark) (d) What is Sarah's attitude toward risk? Explain your answer. (2 marks) (e) Calculate the risk premium in this example. Based on your answer to part d), interpret the concept of risk premium in this example