Question: 2. An individual with zero initial wealth and the utility function U(Y) = Y.4 is confronted with the gamble L1 (16, 4; .40). Answer

2. An individual with zero initial wealth and the utility function U(Y)

2. An individual with zero initial wealth and the utility function U(Y) = Y.4 is confronted with the gamble L1 (16, 4; .40). Answer the following: = (a) What is the certainty equivalent for the gamble? (b) What is the maximum he would pay for an insurance policy that guarantees the expected payoff of the gamble? (c) What is the probability premium? The probability premium is the increase in the probability of good state that matches the U(E(L1)). (d) Now assume the individual is confronted with the gamble L2 = (36, 16; .50). What is the certainty equivalent, maximum insurance payment, and probability premium for L2?

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