Question: 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] Calculate 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?