Shalini's vNM utility for money is $u(x) = x^{1/4}$ where x is her final wealth level. She currently has
$1000, is uninsured, and does not currently have car insurance. When she drives to work, she faces the
following gamble. With 90% probability she will not get into an accident and she will earn a $100
paycheck. With 10% probability she will get into a car accident, not get her paycheck, and have to pay
$900 in auto damages.
Kevin's vNM utility for money is $u(x) = x^{4/5}$ where x is his final wealth level. He currently has $10000,
is uninsured, and does not currently have car insurance. When he drives to work, he faces the following
gamble. With 80% probability he will not get into an accident and he will earn a $4000 paycheck.
With 20% probability he will get into a car accident, not get his paycheck, and have to pay $3000 in
auto damages.
Who has the higher risk premium?
A. Shalini and Kevin would be willing to pay identical insurance premia.
B. Kevin
C. Shalini
D. It cannot be determined.