Problem
Dougie's car is worth $10,000. Dougie is a careless fellow who leaves the top down, the keys in the ignition, and his murse in the front seat. As a result, the probability of his car being stolen is 0.4. If his car is stolen, he will never get it back (the murse is actually a knockoff bag full of expired coupons, assume that it has a value of zero). Dougie has $200,000 in other wealth and his utility function for wealth is u(w) = 20w0-5. Suppose that Dougie can buy $K worth of insurance at a price of $. 55K.
1) Write down Dougie's von Neuman-Morgenstern utility function.
2) Is Dougie risk-loving? Show your calculations.