# A small businesswoman faces a 10% chance of having a fire that will reduce her net worth to \$1.00, a

## 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.

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Related Book For

## Financial Theory and Corporate Policy

ISBN: 978-0321127211

4th edition

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

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Question Posted: April 26, 2016 08:23:53