Question

Question 5.3 Karen is planning a trip. The utility from her upcoming vacation is primarily a function of how much money she spends on it, given by U(Y) = (Y + 625)1/2 where Y represents the amount of money she spends. Karen has $5,000 to spend on this trip. (3 points) If there is a 10% probability that all of Karen's cash will be stolen on her vacation, what is the trip's expected utility? b. (2 points) Suppose that travelers' checks cost 1% of face value. Will Karen's utility be higher if she purchases this form of insurance than if she faces the chance of losing the entire $5,000 without insurance? c. (3 points) What is the maximum amount that Karen should be willing to pay to insure her $5,000 against loss?

Answer 1