Business Loss Recovery, an insurance company, is willing to sell Chris cold-summer insurance at a price of $3,000 a year and promises to pay her $5,000 if the summer is cold and the business fails. Is Chris willing to buy this loss insurance? If she is, is she willing to pay $4,000 a year for it?
Chris’s wealth is $5,000 and it consists entirely of her share in a risky ice cream business. If the summer is cold, the business will fail, and she will have no wealth. Where Chris lives there is a 50 percent chance each year that the summer will be cold.