Question: 1. You have a logarithmic utility function, Um = In (HQ, and you current level of wealth is $5000. (a) Suppose that you are exposed

1. You have a logarithmic utility function, Um = In (HQ, and you current level of wealth is $5000. (a) Suppose that you are exposed to a situation which results in a 50150 chance of winning or losing $1000. If you can buy insurance which completely removes the risk for a fee of $125, will you buy it or take the gamble? (b) Suppose you accept the gamble outlined in {a} and lose, so that your wealth is reduced to $4000. If you are faced with the same gamble and have the same offer of insurance as before, will you buy the insurance the second time around? 2. Assume that you have a logarithmic utility mction for wealth Um? = In (W) and that you are faced with a 50150 chance of wining or losing $1000. How much will you pay to avoid this risk if your current level of wealth is $10,000? How much would you pay if your level of wealth were $1 $100,000

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