Question

Bob's farm harvests corns worth 99 thousand dollars (and nothing else). In each year, there is a 28% chance that a storm will attack and leaves him with only 27 thousand dollars worth of the corns. Bob's preferences over wealth are represented by U=lnw. What is the maximum that Bob is willing to pay for full insurance (in unit of thousand dollars)? Please round your answer to the nearest integer.

Answer 1

U = Inl Weys 99 Pey: | -- 0.98 -0.72 WB = 27 PB - 0.28 $0.50 = 0.72.60 1991 0,20 4n (27) - 0.72x1.99563519 + 0.28 ¥1.43136376 1.4 368 5734 +0000781853. 1.827 639 69 1. 838 1 Now for cl, InteE): EU Ince: 1.898 CE: unlilag 11.842 LE= 68. 8 652 so may WIP = 99 - 68.8652 = 30.1348 Ž 830 Ans.

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