Marsha Owns a Boat That Is Harbored on the East

Essay

Marsha owns a boat that is harbored on the east coast of the United States. Currently, there is a hurricane that is approaching her harbor. If the hurricane strikes her harbor, her wealth will be diminished by the value of her boat, as it will be destroyed. The value of her boat is $250,000. It would cost Marsha $15,000 to move the boat to a harbor out of the path of the hurricane. Marsha's utility of wealth function is U(w) =
. Marsha's current wealth is $3 million including the value of the boat. Past evidence has influenced Marsha to believe that the hurricane will likely miss her harbor, and so she plans not to move her boat. Suppose the probability the hurricane will strike Marsha's harbor is 0.7. Calculate Marsha's expected utility given that she will not move her boat. Calculate Marsha's expected utility if she moves her boat. Which of the two options gives Marsha the highest expected utility?