QUESTION 15

Tatiana just bought a house for $450,000. She lives in an earthquake-prone region where the probability of a major earthquake occurring in any given year is 2%. Tatiana estimates that in the event of such a quake, the property would be worth $100,000 (the value of the land). An insurance company offered her an insurance contract that in exchange for $10,000 annual premium would pay $350,000 if her house is destroyed in a major earthquake.Assume that if the house is not destroyed, it maintains its market value of $450,000. Which of the following statements is correct?

A. Tatiana will definitely purchase the proposed earthquake insurance if she is risk neutral.

B. Tatiana will definitely refuse to purchase the proposed earthquake insurance if she is risk neutral.

C. Tatiana will definitely purchase the proposed earthquake insurance if she is risk averse.

D. Tatiana will definitely refuse to purchase the proposed earthquake insurance if she is risk averse.

E. Both A and D are correct.