An vN-M expected-utility maximizing consumer has a house worth $200,000. She is confronted with a 5%...

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An vN-M expected-utility maximizing consumer has a house worth $200,000. She is confronted with a 5% chance of losing 80% of its value in a flood. Her Bernoulli utility function is of the form u(Y) = In(Y). Assume further that there is an insurance policy available that will compen- sate her for any flood damage (i.e., it will pay her 80% of her house value in the case of the flood). a) What is her expected utility if she purchases the insurance? b) What is her expected utility without the insurance? c) What is the maximum amount she is willing to pay for the insurance? An vN-M expected-utility maximizing consumer has a house worth $200,000. She is confronted with a 5% chance of losing 80% of its value in a flood. Her Bernoulli utility function is of the form u(Y) = In(Y). Assume further that there is an insurance policy available that will compen- sate her for any flood damage (i.e., it will pay her 80% of her house value in the case of the flood). a) What is her expected utility if she purchases the insurance? b) What is her expected utility without the insurance? c) What is the maximum amount she is willing to pay for the insurance?

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Answer Lets break this down step by step a Expected Utility with Insurance First we calculate the ex... View the full answer