Jeff is a risk-neutral middle-aged American. The data on his computer is worth $2000. If his computer gets a virus, he will have to spend $600 to restore the data. Alternatively, he can purchase Norton Antivirus for $100.
a. If he believes there is a 50% chance that he will get a virus, should he buy the antivirus software?
b. Jeff’s neighbor is a psychic who specializes in knowing what will happen to computers. How much is Jeff willing to pay his neighbor to know if he will get a virus, if his neighbor is always correct?
c. How would your answer to part b change if his neighbor is only correct 90% of the time?