You own a plant whose value is $100,000. In case of a fire, the value of your property might be significantly reduced or even destroyed, depending on how severe the accident is. Let us represent risk by the following scenarios:

Scenario Value ($) Probability 1 100,000 0.95 2 50,000 0.04 3 1 0.01 For each scenario, we have the value of your property and a probability.

Clearly, in scenario 1 there is no fire and no loss. Assuming that your risk aversion is represented by a logarithmic utility function, what is the maximum insurance premium that you would be willing to pay? (Hint: The insurance would pay $0, $50,000, $99,999, respectively, in the three scenarios.)