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Suppose we have the following situation:
Our current wealth stock is $150,000.
If an illness occurs, our wealth stock will decrease by $100,000.
The probability of getting ill is 25%. The utility function is U(W)= 3.2W ; U(W)=W2 , where W=wealth; log= logarithm base 10.
1. Compute the expected wealth, expected utility (use up to 4 decimal places) and expected loss.
2. Calculate the maximum amount that we would be willing to pay to get rid of our loss. If we could buy an insurance policy for $30,000, which would completely pay for the medical treatment that we may need, should we purchase this insurance policy? Explain.
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