Kory owns a house that is worth $300,000. If the house burns down, she loses all $300,000. If the house does not burn down, she loses nothing. Her house burns down with a probability of 0.02. Kory is risk-averse.
a. What would a fair insurance policy cost?
b. Suppose an insurance company offers to insure her fully against the loss from the house burning down, at a premium of $1,500. Can you say for sure whether Kory will or will not take the insurance?
c. Suppose an insurance company offers to insure her fully against the loss from the house burning down, at a premium of $6,000. Can you say for sure whether Kory will or will not take the insurance?
d. Suppose that an insurance company offers to insure her fully against the loss from the house burning down, at a premium of $9,000. Can you say for sure whether Kory will or will not take the insurance?