Question: 1. (For this problem please avoid rounding, or round to the ten-thousandths place, 5 numbers after the decimal) Two homeowners are considering fire insurance. Tammy

1. (For this problem please avoid rounding, or round to the ten-thousandths place, 5 numbers after the decimal) Two homeowners are considering fire insurance. Tammy faces a 10% risk of fire, Tommy faces a 30% risk of fire. Tammy and Tommy have the same Bernoulli utility function U(w) = Vw. Each individual's wealth is the value of their house which is worth $9 if there is a fire and $100 otherwise. (a) If the insurance company offers full insurance b = 91 with a premium of p = 13.5, is Tammy willing to buy this insurance? Is Tommy willing to buy this insurance? (b) What expected profit does the insurance company make if they sell this insurance? (c) If the insurance company offers two insurance contracts, one with b = 91 and p = 33, and another insurance contract with b = 9 and p - 2. What is the expected utility of each individual for each contract (I recommend using a calculator or spreadsheet)

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