A small businesswoman faces a 10% chance of having a fire that will reduce her net worth

Question:

A small businesswoman faces a 10% chance of having a fire that will reduce her net worth to $1.00, a 10% chance that fire will reduce it to $50,000, and an 80% chance that nothing detrimental will happen, so that her business will retain its worth of $100,000. What is the maximum amount she will pay for insurance if she has a logarithmic utility function? In other words, if U (W) = In W, compute the cost of the gamble.
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial Theory and Corporate Policy

ISBN: 978-0321127211

4th edition

Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri

Question Posted: