### Calculate the eu of the probabilistic insurance

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##### Reference no: EM131524533

a. Do you consider yourself to be risk-averse?

b. Would you purchase probabilistic insurance?

c. Draw a decision tree for this problem.

d. Show that a risk-averse individual always should prefer the probabilistic insurance.

(This is a difficult problem. To solve it, you must be sure to consider that you are indifferent between the regular insurance and no insurance. Write out the equation relating these two alternatives and see what it implies. Another strategy is to select a specific utility function- the log utility function U(x) = ln(x), say-and then find values for the probability of a claim, your wealth, the insurance premium, and the value of your piece of property so that the utility of paying the insurance premium is equal to the EU of no insurance. Now use these values to calculate the EU of the probabilistic insurance. What is the result?)

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