Calculation of expected utility-maximum amount of insurance

Reference no: EM1315921

Ms. Fogg is planning a trip where she plans to spend $10,000. Her utility is a function of money actually spend on the trip, U(Y) = In(Y).

a) If there is a 25% chance she will lose $1,000 on the trip, what is her expected utility?

b) Suppose Ms Fogg can insure her $1,000 at an actuarially fair premium of $250. Show that her utility is higher if she purchases the insurance.

c) What is the maximum amount that Ms. Fogg is willing to pay to insure the $1,000?

Reference no: EM1315921

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