Question: Consider a household that possesses 160 000 worth of valuables

Consider a household that possesses $ 160,000 worth of valuables such as jewelry. This household faces a 0.2 probability of burglary, in which case it loses $ 70,000 worth of the valuables. Suppose it can buy an insurance policy for $ 15,000 that would fully reimburse the amount of loss from burglary. The household’s utility is given by U(X) = 4X0.5
a. Should the household buy this insurance policy?
b. What is the actuarially fair price for the insurance policy?
c. What is the most the household is willing to pay for this insurance policy that fully covers it against the loss?

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  • CreatedNovember 13, 2014
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