Bianca loves the Toronto Blue Jays. This year they made it to the World Series. Bianca has $1000 in savings. She could spend $600 of the $1000 in making Blue Jays baseball caps. Then, if the Blue Jays win, she estimates that she would earn $1500. If they lose, she won't be able to sell any of her stock. Bianca figures that the Blue Jays have a 0.6 chance of winning the World Series. Bianca's utility function is given by U(w)=w^1/2.
i)If Bianca is an expected utility maximizer, will she make the $600 investment into Blue Jays caps?
ii)Suppose that a friend offers her insurance. He says to Bianca, "If you pay me F dollars whether or not the Blue Jays win, then, in the event that they lose, I will pay you $1500, the amount that you would have earned had they won the World Series. If the Blue Jays lose, I will pay you nothing." What is the maximum value of F that Bianca is willing to pay for the insurance policy?

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The Answer of Bianca loves the Toronto Blue Jays. This year they made it to the World Series. Bianca has $1000 in savings. She could spend $600 of the $1000 in making Blue Jays baseball caps. Then, if the Blue Jays win, she estimates that she would earn $1500. If they lose, she won't be able to sell any of her stock. Bianca figures that the Blue Jays have a 0.6 chance of winning the World Series. Bianca's utility function is given by U(w)=w^1/2. i)If Bianca is an expected utility maximizer, will she make the $600 investment into Blue Jays caps? ii)Suppose that a friend offers her insurance. He says to Bianca, "If you pay me F dollars whether or not the Blue Jays win, then, in the event that they lose, I will pay you $1500, the amount that you would have earned had they won the World Series. If the Blue Jays lose, I will pay you nothing." What is the maximum value of F that Bianca is willing to pay for the insurance policy?

Bianca Loves the Toronto Blue Jays