Suppose John now has W = $4900 and foresees that there is 50% chance encountering a big loss of $4800 in the future. Assuming that John's preference can be described by the utility: U ( W ) = sqrootW
a) What is John's expected future wealth?
b) What is John's expected future utility?
c) If there is some insurance protection available that will cover John's loss, what is the upper limit of the insurance premium charge so that John's still willing to pay for having the insurance coverage? (Hint: this question is asking about what is certainty equivalent?)