Suppose that your wealth is $10,000. Out of $10,000, $1,000 is the value of your house. The probability that your house will be on fire is 10%, and you lost all the value of your house if it catches fire.Now there is an insurance that could provide full coverage of your loss if the accident happens.

(a) Calculate the expected wealth when you are covered by the insurance

(b) Now, suppose your utility function is =W^1/2. Calculate the maximum willingness to pay for the insurance premium. (i.e., the highest price that you are willing to pay for the insurance premium)

(c) Without calculating all the math again, what happens to the maximum willingness to pay for

insurance premium if the probability of your house will be burned increase to 20%?

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