Lynn has a utility function U(W) = W1/2, where W is the amount of wealth that she has. Lynn has two assets. She has $90,000 in a bank account, and she has a house worth $270,000, so her total wealth is initially $360,000. There is a 10% chance that her house is destroyed by a fire.
a) Considering the probability that there is a fire, what is Lynn’s Expected Wealth, E(W)?
b) What is Lynn’s Expected Utility, E(U)?
c) What is Lynn’s Certainty Equivalent)?
d) How much would Lynn be willing to pay for fire insurance?
SHOW ALL OF YOUR WORK