Amy has a utility function u(x)=x.u(x)=x. Her initial wealth is 100. There are two states of...

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Amy has a utility function u(x)=x√.u(x)=x. Her initial wealth is 100. There are two states of the world. In the bad state, her house burns down. She will lose 100 and her wealth will be 0. In the good state, nothing happens to her house and her wealth will be 100. The bad state has a chance of 0.340.34. In other words, there is a probability 0.340.34 that her house will burn down. What is the maximal price Amy is willing to pay to buy the full insurance on the house? Amy has a utility function u(x)=x√.u(x)=x. Her initial wealth is 100. There are two states of the world. In the bad state, her house burns down. She will lose 100 and her wealth will be 0. In the good state, nothing happens to her house and her wealth will be 100. The bad state has a chance of 0.340.34. In other words, there is a probability 0.340.34 that her house will burn down. What is the maximal price Amy is willing to pay to buy the full insurance on the house?

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Answer 1 The maximal price Amy is willing to pay to buy the full insurance on the house is the expec... View the full answer