A risk-averse consumer, whose utility is given by U(W) = √W and wealth is $50,000, is faced with a potential loss of $10,000 with a probability of 0.1. What is the maximum premium they would be willing to pay to protect themselves against this loss?
Suppose utility had been linear in wealth, U(W) = W. How will your answer in (a) above change? (show all details)
Suppose utility had been convex in wealth, U(W) = W^2. How will your answer in (a) above change? (show all details)