Question: II - Reducing Risk Consider a household with $160,000 worth of valuables, such as jewelry. This household faces a 0.2 probability of burglary, which means

II - Reducing Risk

Consider a household with $160,000 worth of valuables, such as jewelry. This household faces a 0.2 probability of burglary, which means it loses $70,000 worth of 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 byU(X) = 4X^0.5.

Should the household buy this insurance policy?
What is the actuarially fair price for the insurance policy?
What is the most the household is willing to pay for this insurance policy that fully covers it against the loss?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!

On January 1, 2018, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of...

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...

3.3 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...

1. (15 points) In the following, let the market demand curve be P = 70 - 2Q, and assume all sellers can produce at a constant marginal cost of c = 10, with zero fixed costs. a) If the market is...

I - Decision Under Uncertainty [50 points] An investor is considering five possible investment strategies. The investor cares only about the expected payoff and possibly the variance of each...

Problem 1 (10 points) New Yorkers rely on the Hudson River for a large share of their drinking water. As such they like the water to be clean and free of toxins and incur significant costs for...

I need Chapter 2 & 3 finished. Chapter 4 & 5, Chapter 6 & 7, & Chapter 8. Some of this is completed, but it isn't 100% finished. Let me know if you can get to it. Personal Finance, Fifth Edition by...

Looking for assistance in Finance HW..... I ONLY Need the FORMULASin the function ribbon (for the answers that I already have, which are attached below) Please advise if you can assist and provide...

check on the file and download the...

read and analysis financial report, some strategy questions BACK COVER FRONT COVER OUTSIDE FLAP Contents Tesco PLC Annual Report and Financial Statements 2014 Strategic report IFC Tesco at a glance...

Adieu Company reported the following current assets and liabilities for December 31 for two recent years: a. Compute the quick ratio on December 31 of both years. b. Interpret the company's quick...

Entity A exchanges car X with a book value of Rs. 13,00,000 and a fair value of Rs.13,25,000 for cash of Rs.15,000 and car Y which has a fair value of Rs.13,10,000. The transaction lacks commercial...

A basketball player shoots when she is 5 m from the backboard. Knowing that the ball has an initial velocity v0 at an angle of 30? with the horizontal, determine the value of v0 when d is equal to(a)...

Problem 4 Determine dy dx of the following function cosy x x . Q . 1 3 What is the value of dy dx for x = 5 ?

Wynn Sheet Metal reported an operating loss of $160,000 for financial reporting and tax purposes in 2011. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn's first...

Cornwell Construction Company has been operating in Pennsylvania for a number of years. During 2019, the firm contracted with the Borough of Lewisburg to build a domed sports complex. Cornwell...

Cornwell Construction Company has been operating in Pennsylvania for a number of years. During 2014, the firm contracted with the Borough of Lewisburg to build a domed sports complex. Cornwell...

Parrot Corporation is a closely held company with accumulated E & P of $300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50% share in Parrot, and they share management...

Beal Manufacturing Co.'s static budget at 12,000 units of production includes $72,000 for direct labor and $12,000 for direct materials. Total fixed costs are $48,000. Determine how much would appear...

If a product that is to be sold in the U.S. is made in China and shipped by ocean, what cost category is going to be higher than if the product was made domestically? Multiple Choice Freight. All of...

9. Take a view or attitude that you hold strongly. Search for information that is opposed to this view or attitude. Discuss.

2. In what way can we say that method affects the result we get?

4. In what way will relationships in a system influence what is reported?