Lee in Problem 1 has built a small weekend shack on a steep, unstable hillside. She spent all her wealth, which is $5,000, on this project. There is a 75 percent chance that the house will be washed down the hill and be worthless. How much is Lee willing to pay for an insurance policy that pays her $5,000 if the house is washed away?
In problem 1
The figure shows Lee’s utility of wealth curve. Lee is offered a job as a salesperson in which there is a 50 percent chance that she will make $4,000 a month and a 50 percent chance that she will make nothing.