Question
4) Your house is now worth $500,000. Every year, there is a 0.02% chance that a fire will occur and cause a complete damage. In
4) Your house is now worth $500,000. Every year, there is a 0.02% chance that a fire will occur and cause a complete damage. In addition, there is a 0.05% chance that a fire will occur and cause a partial damage worth $200,000.
(a) (2 point) What is the fire insurance premium per year for your house assuming that insurance companies need a 20% profit?
(b) (3 points) Suppose that the amount of your liquid wealth is $700,000, and that your risk-aversion parameter is y = 1. Will you buy the insurance?
(c) (2 points) What is your reservation price for the insurance?
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