Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

suppose mark currently has$90,000 in wealth. Also suppose that there is a 1% chance that his house will be destroyed and cost $80,000 to repair

suppose mark currently has  $90,000 in wealth. Also suppose that there is a 1% chance that his house will be destroyed and cost $80,000 to repair (reducing your income to $10,000). Finally, suppose that his utility function is U = square root M , where M is income.

  1. What is the expected value of this situation? What is the expected utility?
  2. Would mark be willing to pay $500 to purchase an insurance policy that fully insures him against his loss? (Full insurance implies that the insurance company will compensate you for the cost of rebuilding your house.) Solve numerically and show with a graph.
  3. What is the highest price that mark would be willing to pay for this insurance policy?

Step by Step Solution

3.52 Rating (166 Votes )

There are 3 Steps involved in it

Step: 1

To find the expected value of the situation we multiply the probability of the event happening by th... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Financial Management

Authors: Eugene F. Brigham, Joel F. Houston

15th edition

1337671002, 978-1337395250

More Books

Students also viewed these Economics questions

Question

Differentiate the function. r(z) = 2-8 - 21/2 r'(z) =

Answered: 1 week ago

Question

Define a traverse in Surveying?

Answered: 1 week ago