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# If you are exposed to a 50/50 chance of gaining or losing \$1000 and insurance that removes the risk costs \$500, at what level of wealth will you be

If you are exposed to a 50/50 chance of gaining or losing \$1000 and insurance that
removes the risk costs \$500, at what level of wealth will you be indifferent relative to
taking the gamble or paying the insurance? That is, what is your certainty equivalent
wealth? Assume your utility function is U(W) = -W-1.

The solution is... View the full answer

Utility(insurance) = 500
Expected Utility ( gamble) =.5(1000) + .5(0)
= 500
Utility function is U(W) = -W-1
Therefore, U'(W) = -1
Thus, the consumer’s utility function is straight line, i.e. the...

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