1. Expected Value. Risk Aversion. Suppose you are considering buying a lottery ticket. The price of the ticket is 1 EUR. The following table provides...

 (where w denotes his wealth). Bob owns and operates a farm. He is concerned that a flood may wipe out his crops. If there is no flood, Bob's wealth is $360,000. The probability of a flood is 1/15. If a flood does occur, Bob's wealth will fall to $160,000. How much would Bob be willing to pay for flood insurance under these conditions? (HINT. Current expected utility is a good starting point. Next step - find it's equivalent in terms of risk-free income.)

101