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Risk of the accident that totals car

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Petra's utility is U = (W/1000)^(1/2), where W is her wealth in dollars. Currently her wealth is W = $1,200,000. If her car is totaled in an accident, her wealth will be reduced by $50,000. She thinks the probability of that happening is 5%.

  • What is the expected value of Petra's wealth given the risk of the accident that totals her car?
  • What is the most she would be willing to pay for insurance coverage that would compensate her for the full value of her loss if her car is totaled?
  • What is the most she would be willing to pay for the same insurance coverage if she were risk neutral?

Reference no: EM132317798

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