Q12-1a

Questions 1 - 4 use this one data set, but separate answers are requested for various parts.

A homeowner has a home worth $ 300,000, and some financial investments worth $ 100,000.

There are no loans against the home, so a decision must be made with respect to buying homeowner's insurance to protect against loss by fire.Such a policy would cost $2000/year.Assume the risk of a fire is 0.005in a year, and if a fire occurs it would be a total loss.There is no deductible (self-participation) when a loss occurs.Assume the homeowner's utility of wealth function is given byu(W) =log10(W + 200) where the log function is base 10 (the default for the "log" function in Excel), and wealth is measured in thousands of dollars.For example, if the wealth is $ 600,000, the utility would belog10(600 + 200)=log10(800)= 2.90309.

Question 1.Obtain the Expected Monetary Value(EMV)for this uncertain situation (lottery).

Express answer in dollars (not thousands).