7. Assume one individual has the utility function expressed by U(W)=lnW; her current wealth W0...
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7. Assume one individual has the utility function expressed by U(W)=lnW; her current wealth W0 = $120; she faces a potential loss L. L can be either $20 (with the probability of 20%) and $100 (with the probability of 20%).
- Is she a risk-averse person?
- What is her Arrow-Pratt measure of absolute risk aversion? Does she have CRRA?
- What is the actuarially fair insurance price, if she is going to purchase an insurance policy that fully covers the loss?
- What is her expected value of final wealth?
- What is the expected utility of final wealth if she does not purchase insurance?
- What is her certainty equivalent wealth?
- What is the maximum premium of insurance she is willing to pay to fully cover the loss?
solve e f g please
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