1. Suppose that your wealth is $250,000. You buy a $200,000 house and invest the remainder in a risk-free asset paying an annual interest rate of 6%. There is a probability of .001 that your house will burn to the ground and its value will be reduced to zero. With a log utility of end-of-year wealth, how much would you be willing to pay for insurance (at the beginning of the year)?

(Assume that if the house does not burn down, its end-of-year value still will be $200,000.)