Question: Your utility function is U = √2C, where C is the amount of consumption that you have in any given period. Your income is $45,000 per year and there is a 2 percent chance that you will be involved in a catastrophic accident that will cost you $33,750 next year.
a. What is your expected utility?
b. Calculate an actuarially fair insurance premium. What would your expected utility be if you were to purchase the actuarially fair insurance premium?
c. What is the most that you would be willing to pay for insurance, given your utility function?