suppose mark currently has  $90,000 in wealth. Also suppose that there is a 1% chance that his house will be destroyed and cost $80,000 to repair (reducing your income to $10,000). Finally, suppose that his utility function is U = square root M , where M is income.

1. What is the expected value of this situation? What is the expected utility?
2. Would mark be willing to pay $500 to purchase an insurance policy that fully insures him against his loss? (Full insurance implies that the insurance company will compensate you for the cost of rebuilding your house.) Solve numerically and show with a graph.
3. What is the highest price that mark would be willing to pay for this insurance policy?

Answer rating: 100% (QA)

Answer To calculate the expected value of this situation we need to consider the probabilities of di... View the full answer