A person with utility over wealth () = ln(), and initial wealth 0= $100,000 may...
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A person with utility over wealth () = ln(), and initial wealth 0= $100,000 may lose a $20,000 asset with a 25% probability. A company offers insurance against such loss for a price F. Compute the actuarily fair price, (, and the maximum price this person is willing to pay for full insurance in this situation, M). Hint: Use a calculator to compute the natural logarithm of a value , (). Round up any values using four decimals when needed. Use the exponent function, () or x, to invert equations when needed. For example: ( ) = = (). Which of the following alternatives is correct? (Ignore cents of dollars if needed.) (a) The actuarily fair price is $5,427, but this person is willing to pay up to $5,000 (b) The actuarily fair price is $5,221, but this person is willing to pay up to $5,682 (c) The actuarily fair price is $5,000, but this person is willing to pay up to $5,427 (d) The actuarily fair price is $5,000, but this person is willing to pay up to $5,221
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