Texts: Consider a person with a current wealth of R150,000 who faces the prospect of a 35 percent chance of losing his or her R70,000 car through theft during the next year. Suppose also that his or her von Neumann-Morgenstern utility function is logarithmic; that is,
1.1 If this person faces next year without insurance, what is the expected utility?
1.2 Assuming that the insurance company has only claim costs and that administrative costs are zero, what is a fair insurance premium he or she will pay?
1.3 If the person completely insures the car, what will be the expected utility?
1.4 By purchasing fair insurance, is the person better off or worse off? Explain.
What is the maximum insurance premium the person is willing to pay?