Adam Has Wealth of $40,000 as Long as His Business

question 17

Multiple Choice

Adam has wealth of $40,000 as long as his business does not burn down. However, there is a 50% probability that his business will burn down, causing a loss of $30,000 and leaving him with $10,000 of wealth. Adam's utility function is given by U = W^0.5, where W is wealth. Suppose Adam purchases insurance to cover the potential $30,000 loss. If the insurance premium is actuarially fair, Adam's utility with insurance is:

• A) 100.40.
• B) 145.23.
• C) 158.11.
• D) 161.51.

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Definitions:

Domain

The set of all possible input values for a function.

Rational Function

A function represented by the ratio of two polynomials.

Rational Expression

A ratio of two polynomials.

Simplify

The process of reducing an expression or equation to its simplest form, often by combining like terms or applying mathematical operations.