Microsoft Word – 2016s_ps1Consider an individual with $10,000 in initial wealth that faces a potential loss of $3,600. (Wealth would then be $6,400 if the loss occurs and the individual does not buy...

Microsoft Word – 2016s_ps1Consider an individual with $10,000 in initial wealth that faces a potential loss of $3,600. (Wealth would then be $6,400 if the loss occurs and the individual does not buy insurance.) The probability of the loss is 25%. The individual has expectedutility preferences with the utility function u=√