Assume one individual has the utility function expressed by U(W)=10W for Question 7, and all other situations remain the same. What is the maximum premium of insurance she is willing to pay to fully cover the loss?

***Question 7 :

7. Assume one individual has the utility function expressed by U(W)=lnW; her current wealth W0 = $120; she faces a potential loss L. L can be either $20 (with the probability of 20%) and $100 (with the probability of 20%).

1. a) Is she a risk-averse person?

2. b) What is her Arrow-Pratt measure of absolute risk aversion? Does she have CRRA?

3. c) What is the actuarially fair insurance price, if she is going to purchase an insurance policy

   that fully covers the loss?

4. d) What is her expected value of final wealth?

5. e) What is the expected utility of final wealth if she does not purchase insurance?

6. f) What is her certainty equivalent wealth?

7. g) What is the maximum premium of insurance she is willing to pay to fully cover the loss?