Home » 2)(20 points) Lynn has a utility function U(W) = W 1/2 , where W is the amount of wealth that she has.Lynn has two assets.

2)(20 points) Lynn has a utility function U(W) = W 1/2 , where W is the amount of wealth that she has.Lynn has two assets.

2) (20 points) Lynn has a utility function U(W) = W1/2, where W is the amount of wealth that she has. Lynn has two assets. She has \$40,000 in a bank account, and she has a house worth \$600,000, so her total wealth is initially \$640,000. There is a 2% chance that her house is destroyed by a fire.

a) (4 points) Considering the probability that there is a fire, what is Lynn’s Expected Wealth, E(W)?

E(W) = ____________________________

b) (4 points) What is Lynn’s Expected Utility, E(U)?

E(U) = ______________________________

c) (4 points) What is Lynn’s Certainty Equivalent?

CE = ______________________________

d) (4 points) How much would Lynn be willing to pay for fire insurance?

WTP = _______________________________

e) (4 points) What is Lynn’s Risk Premium?

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