A consumer who obeys the von Neumann-Morgenstern axioms and has an initial wealth of 160,000 is subject to a fire risk. There is a 5 percent probability of a major fire with a loss of 70,000 and a 5 percent probability of a disastrous fire with a loss of 120,000. Her utility function is U = W0.5. She is offered an insurance policy with the deductibility provision that she bear the first 7620 of any fire loss. What is the maximum premium that she is willing to pay for this policy?

Answer rating: 100% (QA)

09 160000 Quitial Wealth Uw W Expected utility 09160000 09 400 360 25 Expected utility 09 1... View the full answer