A train carrying bank notes worth Ugx 100 million has 10% chance of being looted on

the way by a notorious bandit. On the off chance the train gets looted, Credit Bank will lose Ugx 100 million, abandoning an empty chest; on the off chance

that the wagon doesn’t get looted, CB will have the entire money safe with them. CB

maximizes expected utility and its VNM utility function is 𝑢(𝑤) = 5𝑤0.8 + 75.

a) What can be said about CB’s behavior

b) What is the expected amount of money CB will lose?

d) What is CB’s expected wealth?

e) What is CB’s expected utility? f) What is CB’s certainty equivalent wealth i.e the certain wealth level that gives CB

an indistinguishable expected utility from its indeterminate circumstance?

g) What is the maximum amount CB would pay for insurance i.e what is the greatest

premium CB would pay an insurance agency to cover the majority of its

misfortunes?

h) What is CB’s risk premium i.e the amount more than its expected loss is it willing

to pay for full protection?