5. Larry, who has wealth (w) of 100, faces a 25% probability that a catastrophe will eliminate all of hiswealth. Larry's utility function is u(w) = In (w + 1). We will cover insurance on 12/2 in case you wantto hold off on parts (b) and (d) until then.Characterize Larry's preference over risk. Is he risk-averse, risk-loving, or risk-neutral?а.Explain.b. What is the highest premium that Larry would accept for full insurance?C.Alternatively, suppose that Larry's utility is u (w) = e". Characterize his preference for riskand explain your answer.d.Under this alternative utility function, what is the highest premium that Larry would accept forfull insurance? Explain.

A. Larry loses all of his wealth with 25% probability and he loses nothing with 75% probability. He…

5. Larry, who has wealth (w) of 100, faces a 25% probability that a catastrophe will eliminate all of his wealth. Larry's utility function is u(w) = In (w + 1). We will cover insurance on 12/2 in case you want to hold off on parts (b) and (d) until then. Characterize Larry's preference over risk. Is he risk-averse, risk-loving, or risk-neutral? a. Explain. b. What is the highest premium that Larry would accept for full insurance? c. Alternatively, suppose that Larry's utility is u(w) = ew. Characterize his preference for risk and explain your answer.

5. Larry, who has wealth (w) of 100, faces a 25% probability that a catastrophe will eliminate all of his wealth. Larry's utility function is u(w) = In (w + 1). We will cover insurance on 12/2 in case you want to hold off on parts (b) and (d) until then. Characterize Larry's preference over risk. Is he risk-averse, risk-loving, or risk-neutral? a. Explain. b. What is the highest premium that Larry would accept for full insurance? c. Alternatively, suppose that Larry's utility is u(w) = ew. Characterize his preference for risk and explain your answer.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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