A person with the following utility function, u(x) = ln(x) faces a world where with...
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Finance
A person with the following utility function, u(x) = ln(x) faces a world where with probability 0.1 will suffer of identity theft which will reduce their wealth from $250000 to $100000. This means that we can write Eu()0.9ln ()0.1n(y) where would be the wealth under no identity theft and y the wealth under identity theft. This means that the marginal utilities are: 0.9 MUy0.1 MU Using this information answer the following questions 1 What is this persons attitude towards risk? explain your answer? 2) What is the certainty equivalent and risk premium? find your answer algebraically and use a graph to represent them. 3) What is the optimal purchase of insurance if the person faces an insurance premium of 15%? 4) What is the optimal purchase of insurance if the person faces an insurance premium of 10%
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