Computation the expected amount of disposable income

Reference no: EM1313873

Computation the expected amount of disposable income of project

Consider a landlord that owns an apartment complex in Southern California. The landlord utility over wealth is given by U = √W. The landlord currently has $100,000 of disposable income. There is a 60% chance that a fire will destroy the apartment complex, which would cost him approximately $97,500 to repair. On the other hand, if a fire does not destroy the complex, then the landlord expects to collect about 60,000 in rent payments from his tenants.

a) What is the expected amount of disposable income the landlord will have facing this risky situation? Is this a fair gamble?

b) What is the expected utility of the landlord in this risky situation assuming he cares only about his disposable income?

c) What amount of certain income would make the landlord as happy as he would be facing the risky situation?

d) What is the most the landlord would be willing to pay to avoid the risk of fire?

Reference no: EM1313873

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