Consider a household that possesses $100,000 worth of valuables (computers, stereo equipment, jewelry, and so forth). This household faces a 0.10 probability of a burglary. If a burglary were to occur, the household would have to spend $20,000 to replace the stolen items. Suppose it can buy an insurance policy for $500 that would fully reimburse it for the amount

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Consider a household that possesses $100,000 worth of valuables (computers, stereo equipment, jewelry, and so forth). This household faces a 0.10 probability of a burglary. If a burglary were to occur, the household would have to spend $20,000 to replace the stolen items. Suppose it can buy an insurance policy for $500 that would fully reimburse it for the amount of the loss.
a) Should the household buy this insurance policy?
b) Should it buy the insurance policy if it cost $1,500? $3,000?
c) What is the most the household would be willing to pay for this insurance policy? How does your answer relate to the concept of risk premium discussed in the text?
Related Book For answer-question

Microeconomics

2nd edition

Authors: Douglas Bernheim, Michael Whinston

ISBN: 978-0073375854