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What is mike expected utility from the trip

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Mike is going to Nepal and plans to take $2500. With probability of 0.5 he will lose $1600 on his way to Nepal. Thus, he will spend $2500 if he is lucky and only $900 if he is unlucky. His utility from the trip is given by

U (w) = w0.5

Where w is the amount of money he spends in Nepal.

(a) What is Mike's expected utility from the trip?

(b) Suppose Mike can buy an insurance policy that will cover the entire $1600 loss. Will he buy if its price is $900?

(c) What is Mike's reservation price for this insurance policy?

(d) What is the competitive-equilibrium price of the policy if insurance companies have perfect information and incur no transaction costs?

Reference no: EM132471592

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