Question: Jon has a utility function expressed by U(W) where W is Jon's wealth. Currently, Jon has W = $120. He faces potential loss L =

Jon has a utility function expressed by U(W) where W is Jon's wealth. Currently, Jon has W = $120. He faces potential loss L = $100 with probability p = 0.25.

Utility = 9.7

1) If Jon purchases insurance for the pure premium, what is his utility? Jon now pays $25 and the insurance firm will indemnify him for $100 if he experiences the loss.

2) Is Jon better off with insurance than he was without it?

3) What is the most Jon would be willing to pay for insurance?

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