Suppose Diana's Utility Function Is Given By: U = 100W⁰

question 30

Essay

Suppose Diana's utility function is given by: U = 100W^0.9 where W is her wealth in thousands. Her current wealth is $1,000.
i)Suppose Diana faces a 0.1 chance of losing $100. Calculate her willingness to pay for an insurance policy that would pay her $100 in the event of such a loss.
ii)Diana's utility is greatly augmented by her house. If she were to lose it, it would be reduced to: U = W^0.9. Calculate the loss of wealth that would be equivalent, in terms of its utility impact, to the death of her children.

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