Valentina lives in a 100-year floodplain near the Yakima River. Each year she faces a 0.011 probability
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Question:
Valentina lives in a "100-year floodplain" near the Yakima River. Each year she faces a 0.011 probability of a flood, that will cause $64,000 in damage if it occurs. Her annual income is $86,000. Valentina's utility of consumption is U(C) = C0.42, where C is her entire income if there is no flood, and she consumes income minus damage if there is a flood. Because her utility function makes her risk-averse, Valentina wants to buy flood insurance to cover all of her losses in case of a flood.
What is the maximum annual risk premium for full insurance that Valentina is willing to pay, to the nearest $1?
Related Book For
Financial Management for Public Health and Not for Profit Organizations
ISBN: 978-0132805667
4th edition
Authors: Steven A. Finkler, Thad Calabrese
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