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Problem 16.3.3 Jill possesses $160,000 worth of valuables. She faces a 0.2 probability of a burglary, where she would lose jewelry worth 3570.000. She can
Problem 16.3.3 Jill possesses $160,000 worth of valuables. She faces a 0.2 probability of a burglary, where she would lose jewelry worth 3570.000. She can buy an insurance policy for $15,000 that would fully reimburse the$70,000. Her utility function is um = 43:05. a. What is the actuarially fair price for the insurance policy? b. Should she buy this insurance policy? c. What is the most that she is willing to pay for an insurance policy that fully covers it against loss? M Problem 16.3.6 After Hurricane Katrina in 2005 (see the Application \"Limited Insurance for Natural Disasters"), the government offered subsidies to people whose houses were destroyed. How does the expectation that the government will offer subsidies for future major disasters affect the probability that risk-averse people will buy insurance and the amount they buy? Use a utility function for a risk-averse person to illustrate your answer. (Hint: See Solved Problem 16.5)
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