Pat owns a property worth $1 million. The probability of it being subject to fire and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Pat owns a property worth $1 million. The probability of it being subject to fire and becoming worthless is 1%. An insurance agency offers an insurance covering the property's full value of $1 million against an insurance premium of $ 12500. Assume that Pat's utility function is u(W)= We where W is her total net wealth in $ and a is a constant. a) Will Pat buy the insurance? b) For the remaining problem assume that a = 0.5, i.e., u(W) = W0.5, b1) The property is Pat's only asset. How much would she be willing to pay for a full insurance that gives her $ 1 million if the property goes up in flames? b2) Assume that there are no insurances available and that Pat has two properties instead of one. The two properties are identical in terms of worth. The risk of devastating fires occurring is 1% for each of them. How much does each of the new properties have to be worth in order for Pat to be better off than with the single apartment that is of worth $ 1 million? b3) As a final option she considers contacting an old acquaintance who operates a roulette wheel at a nearby casino. Assume for simplicity that the casino doubles the bet when winning, i.e., you get 2 times your bet back when you win on color (i.e., black or red). By manipulating the machinery the acquaintance can affect the outcome probabilities of the wheel. Which is the lowest probability of winning that would make Pat bet her property in b1) on a single bet on red? Pat owns a property worth $1 million. The probability of it being subject to fire and becoming worthless is 1%. An insurance agency offers an insurance covering the property's full value of $1 million against an insurance premium of $ 12500. Assume that Pat's utility function is u(W)= We where W is her total net wealth in $ and a is a constant. a) Will Pat buy the insurance? b) For the remaining problem assume that a = 0.5, i.e., u(W) = W0.5, b1) The property is Pat's only asset. How much would she be willing to pay for a full insurance that gives her $ 1 million if the property goes up in flames? b2) Assume that there are no insurances available and that Pat has two properties instead of one. The two properties are identical in terms of worth. The risk of devastating fires occurring is 1% for each of them. How much does each of the new properties have to be worth in order for Pat to be better off than with the single apartment that is of worth $ 1 million? b3) As a final option she considers contacting an old acquaintance who operates a roulette wheel at a nearby casino. Assume for simplicity that the casino doubles the bet when winning, i.e., you get 2 times your bet back when you win on color (i.e., black or red). By manipulating the machinery the acquaintance can affect the outcome probabilities of the wheel. Which is the lowest probability of winning that would make Pat bet her property in b1) on a single bet on red?
Expert Answer:
Related Book For
Operations and Supply Chain Management
ISBN: 978-0078024023
14th edition
Authors: F. Robert Jacobs, Richard Chase
Posted Date:
Students also viewed these economics questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Prerequisite: You will be using "utils.py" from Python 2 Assignment Task 1) In "utils.py," add a Python function called "calculate_fourier_coefficients" that calculates the coefficients of a Fourier...
-
Describe two common methods of depreciation including the resulting pattern of charges to the statement of profit and loss for depreciation expense over an asset's useful economic life. In what...
-
Your camping buddy has an idea for a light to go inside your tent. He happens to have a powerful (and heavy!) horseshoe magnet that he bought at a surplus store. This magnet creates a 0.20 T field...
-
The fugacity co-efficient of a substance is the ratio of its fugacity to the (a) Mole fraction (c) Pressure (b) Activity (d) Activity co-efficient.
-
Herbert, Inc., acquired all of Rambis Companys outstanding stock on January 1, 2014, for $574,000 in cash. Annual excess amortization of $12,000 results from this transaction. On the date of the...
-
Normalize the given ERD diagram This is my attempt. I would like to know if it is correct and if not for it to be corrected. PROFESSOR PK PROF ID INTEGER PROF LNAME VARCHAR(50) PROF FNAME...
-
The trial balance of Pacilio Security Services Inc. as of January 1, 2017, had the following normal balances: Cash ................. 78 , 972 P e t t y C a s h . . . . . . . . . . . . . . . . 100 A c...
-
J & Torrey is an advertising agency. The firm uses a job cost system in which each client is a different "job." W & Torrey traces direct labor, software licensing costs, and travel costs directly to...
-
Dr. Binod Sinha contracted with Cabanaman Pools & Spa, LLC, to perform services at his home for a contract price of \($41,000.\) During the course of the work, Sinha paid Cabanaman \($31,000.\) Then,...
-
Anders Johansson owned Titan Custom Cabinets, Inc., which had accounts with the bank SunTrust. In early May 2017, Johansson deposited a check from a customer into one of Titans accounts at SunTrust....
-
Teri Zemencik was an employee at IGS Industries for 22 years until her termination due to embezzling funds. At the time of her termination, Zemencik was the payroll supervisor in IGSs accounting...
-
In June 2018, Anthony Houston maintained a deposit account with Fifth Third Bank. On or about June 15, 2018, an unknown third party deposited a check in Houstons account at one of Fifth Thirds...
-
The plaintiff in this case is a resident of South Sudan who attended Princeton University from September 2007 to 2011. She opened an account with Bank of America while she was a student and deposited...
-
Oxygen at a pressure of 2 atm and 27C blows across a 50-cm-square plate at a velocity of 30 m/s. The plate temperature is maintained constant at 127C. Calculate the total heat lost by the plate.
-
Given that all the choices are true, which one concludes the paragraph with a precise and detailed description that relates to the main topic of the essay? A. NO CHANGE B. Decades, X-ray C. Decades...
-
Plan production for the next year. The demand forecast is spring, 20,000; summer, 10,000; fall, 15,000; winter, 18,000. At the beginning of spring you have 70 workers and 1,000 units in inventory....
-
Sarahs Muffler Shop has one standard muffler that Fits a large variety of cars. Sarah wishes to establish a reorder point system to manage inventory of this standard muffler. Use the following...
-
Develop a cause and effect (fishbone) diagram to address everything that impacts your grade in this course. How much is under your control?
-
In a stage of impulse-reaction turbine, steam enters with a speed of \(250 \mathrm{~m} / \mathrm{s}\) at an angle of \(30^{\circ}\) in the direction of blade motion. The mean blade speed is \(150...
-
A single row impulse turbine develops \(130 \mathrm{~kW}\) at a blade speed of \(180 \mathrm{~m} / \mathrm{s}\) using \(2 \mathrm{~kg} / \mathrm{s}\) of steam. The steam leaves the nozzle at \(400...
-
A simple impulse turbine has one ring of moving blades running at \(150 \mathrm{~m} / \mathrm{s}\). The absolute velocity of steam at exit from the stage is \(80 \mathrm{~m} / \mathrm{s}\) at an...
Study smarter with the SolutionInn App