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Suppose a decision maker has initial wealth $2,560,000 and is considering insuring an asset valued at $179,200. Assume that if damage to the asset occurs,
Suppose a decision maker has initial wealth $2,560,000 and is considering insuring an asset valued at $179,200. Assume that if damage to the asset occurs, the asset will lose 80% of its value. Also assume the damage will occur with probability p=4%. Assume their utility function is u(x)=x. (a) Compute the expected loss \$ (b) Compute the maximum amount they would pay for the insurance. (Assume the insurance will completely cover any loss should damage occur.) $
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