Suppose that an individual has $625 in housing wealth (w)

| November 24, 2016

1.Suppose that an individual has $625 in housing wealth (w). The probability of a fire resulting in a loss (L) of $600 is 20 percent. Suppose that this individual’s utility function is U(w) = w0.5. Calculate and graph the following values: expected value (EV), expected utility (EU), certainty equivalent wealth (wc), risk premium, actuarially fair premium, U(w), U(EV), and U(w-L).

2. Suppose that an individual has $250,000 in housing wealth (w). The probability of a fire resulting in a loss (L) of $240,000 is 30 percent. Suppose that this individual’s utility of wealth is U(w) = w0.5. Calculate and graph the following values: expected value (EV), expected utility (EU), certainty equivalent income (Yc), risk premium, actuarially fair premium, U(w), U(EV), and U(w-L).

3.Suppose that an individual has $100,000 in housing wealth (w). The probability of a fire resulting in a loss (L) of $60,000 is 10 percent. Suppose that this individual’s utility function is U(w) = w0.5. Calculate and graph the following values: expected value (EV), expected utility (EU), certainty equivalent income (Yc), risk premium, actuarially fair premium, U(w), U(EV), and U(w-L).

4. Please graph the results, using the actual numerical solutions, from one of the problems above.

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