Your task is to extend it so that it shows the following: "For a given fair premium and expected loss, willingness to pay for insurance is greater the higher is the loss and the lower is the probability of loss."

Why People Buy Insurance Assume probability of loss is 0.4 and loss is $10,000. U ( 20,000) ..........t.M..............__...._"...'.m.m-....._-_......n...,_....mm"-.. _ 000,000) 10,000 16,000 20,000 E(loss) = $4,000; EV = $16,000 Diminishing MU of wealth says that (U(EV) > EU) = length of CB 9 prefer to pay the $4,000 for certain than risk the gamble Would be willing to pay an additional risk premium up to AB