Maria Is Planning a Trip to Hawaii

question 73

Essay

Maria is planning a trip to Hawaii. The utility from the trip is a function of how much she spends on it (Y)given by U(Y)= log Y. Maria has $10,000 to spend on the trip. If she spends all of it, her utility will be: U(10000)= log(10000)= 4.
Suppose there is a 25 percent probability that Maria will lose $1000 of the cash on the trip. What is the maximum amount that Maria would be willing to pay to insure $1000?

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Definitions:

Permanent Account

An account in the general ledger that carries its ending balance over to the next accounting period, such as assets, liabilities, and equity accounts.

Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company's financial condition at a specific time, summarizing its assets, liabilities, and shareholders' equity.

Income Statement Debit Column

Typically, an income statement does not use a debit column; instead, expenses decrease revenue to show net income or loss.

Balance Sheet Credit Column

Part of the balance sheet that records liabilities, equity, and certain revenues that increase the company's worth or decrease its debts.