Penn State ECON 417W – A consumer with utility function u(x) =√x wants to purchase

A consumer with utility function u(x) =√x wants to purchase full insurance from Company Z. However, he doesn’t know how much the premium, Q, will be. It may be $10,000or $20,000 with equal probability. The consumer’s wealth is $100,000 and the potentialloss is $25,000. How much is the consumer willing to pay to know with certainty whetherthe premium is $10,000?

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