Kristy’s house is worth $200,000. She faces a one percent probability of a storm that will cause $50,000 in damages.
(e) Kristy can purchase storm insurance for $0.01 per $1 of coverage. How much insurance will Kristy purchase?
(f) In a figure, draw Kristy’s utility-to-wealth function. Label her expected wealth, the certainty equivalent amount, and the risk premium. Also label her expected utility with and without insurance coverage from part (e).