What is the maximum amount she will pay

Assignment Help Financial Management

Reference no: EM131245435

A small businesswoman faces a 10% chance of having a fire that will reduce her net worth to $1.00, a 10% chance that fire will reduce it to $50,000, and an 80% chance that nothing detrimental will happen, so that her business will retain its worth of $100,000.

What is the maximum amount she will pay for insurance if she has a logarithmic utility function? In other words, if U(W) = in W, compute the cost of the gamble. [Note: The insurance pays $99,999 in the first case; $50,000 in the second; and nothing in the third.]

Reference no: EM131245435

Questions Cloud

What is needed is a dictionary of free lists : A major design consideration is how to organize the collection of free lists, which are distinguished by the length of the strings. Essentially, what is needed is a dictionary of free lists, organized by string lengths.

What kind of utility function of wealth might be consistent : What kind of utility function of wealth might be consistent with an individual gambling and paying insurance at the same time?

What is the size of governemnt surplus or deficit : Suppose that the government decides to impose an income tax as opposed to "lump sum" tax. We can now model the conomy as follows. What is the size of governemnt surplus or deficit in this case? What is the fiscal multiplier in this case?

Art as an important component of a culture : ANTH 1001 - INTRODUCTION TO ANTHROPOLOGY - Why is art an important component of a culture and the reason why art is an important component of a culture is that art preserves our heritage, and art is a tool for the dissemination of culture. Meanwhil..

What is the maximum amount she will pay : What is the maximum amount she will pay for insurance if she has a logarithmic utility function? compute the cost of the gamble.

Recursive function that returns the height of a binary tree : Assume that a given BST stores integer values in its nodes. Write a recursive function that sums the values of all nodes in the tree.

What is your certainty equivalent wealth : If you are exposed to a 50/50 chance of gaining or losing $1000 and insurance that removes the risk costs $500, at what level of wealth will you be indifferent relative to taking the gamble or paying the insurance?

What is the time to expiration of the two options : The yield curve is flat and the yield is .80%. A call option with a strike price of 65 on the Fox Stock, which is currently trading at $62.00, is trading for $1.50. A put option with the same expiration and strike price is trading at $4.21. What i..

Write a recursive function that traverses a binary tree : Write a recursive function that traverses a binary tree, and prints the value of every node which has at least four great-grandchildren.

User Account

All Pages