Von neumann-morgenstern utility function

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Arya has the following VonNeumann-Morgenstern utility function: u(c; ) = p c Arya has $200,000 in cash and a castle (Winterfell) worth $160,000. There is a 0.02 chance that her castle will burn down and be worth only $50,000.

(a) Kings Landing is offering money to buy the castles around the realm. What is the least amount Arya will be willing to sell her castle for?

(b) What is the "fair price" for Arya? Show your work. How much insurance will she buy at this price?

Reference no: EM131246738

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