Utility function and total wealth

Reference no: EM1312776

Let's say you have a total wealth (W) of $100,000, which includes a car worth $20,000. The probability of losing your car (over one year) is 25%. Your utility function is U(W) = ln(W).

(a) What is your expected wealth for the next year?

(b) What is your expected utility for the next year?

(d) What is your expected utility if you pay the AFP for full coverage (b = $20,000)?

(e) What is the maximum premium you are willing to pay?

What is the amount of the difference between the maximum premium and AFP, and what is this called?

Reference no: EM1312776

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