A valuable object worth $10,000 has the probability 1/4 of being damaged accidentally. The damaged object...

A valuable object worth $10,000 has the probability 1/4 of being damaged accidentally. The damaged object will be worth $6,400. The owner’s utility function is u(w) = w^(1/2).

(a) The price of an insurance against losing the $3,600 is $900. Will the owner be willing to buy the insurance?

(b) What is the highest price that the owner would be willing to pay to insure against the $3,600 loss?

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Expert Solution

Rahul Sunny answered 2 years ago

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