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problem: Consider a landowner that owns an apartment complex in Southern California. The landowner utility over wealth is given by U = √W. The landowner currently has $100,000 of disposable income.  There is a 60 percent 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 landowner expects to collect about 60,000 in rent payments from his tenants.

[A] Determine the expected amount of disposable income the landowner will have facing this risky situation?  Is this a fair gamble?

[B] Determine the expected utility of the landowner in this risky situation assuming he cares only about his disposable income?

[C] find out the amount of certain income would make the landowner as happy as he would be facing the risky situation?

[D] Determine the most the landowner would be willing to pay to avoid the risk of fire?

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  • Category:- Basic Finance
  • Reference No.:- M918578

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