Pleas help with parts D and E Question 2Willy owns a small chocolate factory, located close to a river that occasion-ally floods in the spring, with disastrous consequences. Next summer, Willy1plans to sell the factory and retire. The only income he will have is the pro-ceeds of the sale of his factory. If there is no flood, the factory will be worth$500,000. If there is a flood, then what is left of the factory will be worth only$50,000. Willy can buy flood insurance at a cost of 0.10 for each $1 worth ofcoverage. Willy thinks that the probability that there will be a flood this springis 0.1. Let cF denote dollars if there is a flood and CNF denote dollars if there isno flood. Willy's utility function is u = √e. Willy is trying to decide how muchflood insurance (K) to buy.(a) What is the risk attitude of Willy? Why?(b) Please find the expected wealth and expected utility of Willy.(c) Find the equation that shows the relationship between cF and CNF.(d) Find the optimal level of CF, CNF and K.(e) Suppose the insurance is unfair, and y = 0.2. What are the optimal levelof CF, CNF and K.

Given information Worth of the factory without flood=$500000 Worth of the factory with flood=$50000…

Answered: Willy owns a small chocolate factory,…

Willy owns a small chocolate factory, located close to a river that occasion- ally floods in the spring, with disastrous consequences. Next summer, Willy

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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