Question: A person's utility function is U(I) = I1/2where income, I, is $625.There is a 10 percent chance of having an accident incurring a loss that

A person's utility function is U(I) = I1/2where income, I, is $625.There is a 10 percent chance of having an accident incurring a loss that would leave the person with $81 income.Use a graph to illustrate your answers to the questions below.

a. What is expected income? Show how you calculated it.

b. Find and show on your graph the utility level if the income calculated above (part a)with certainty.

c. Calculate expected utility given this uncertain outcome.Show the expected utility level on your graph.

d. What is the risk premium that the person would be willing to pay? Show it on your graph and explain.

e. An insurance company can insure against this loss for a payment of $55. Determine and show on the graph whether this policy would make better or worse off.

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