A risk averse individual is deciding whether to purchase insurance to protect them against

the potential damage that a fire would cause at their home. There is a 10% chance of a fire

and the damage (should there be a fire) will be $50,000.

a) If an insurance company offers this individual an insurance policy with an actuarially

fair premium, will they purchase it? Explain why or why not.

b) What is the maximum that this individual will pay for this policy? Explain (no

calculation is necessary).

c) What is the value of information in this case? Calculate the value and explain its

meaning.