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Suppose you have a home worth $1,000,000. There is a 1 percent chance of flooding that causes $100,000 in damage to your house. Assume your
Suppose you have a home worth $1,000,000. There is a 1 percent chance of flooding that causes $100,000 in damage to your house. Assume your utility is where is the value of your home. What is your expected utility of your home value? Now suppose you can make modifications to your property that cost but the modifications will completely avoid the risk of flooding. How much would you be willing to pay for these modifications? Two individuals have the same income ($100,000), but different potential healthcare expenses. Person A's probability of having $80,000 in healthcare expenses is 0.5 percent. Person B's probability of having $800 in healthcare expenses is 50 percent. Assume your utility is where is your income. Calculate each person's expected income and expected utility. Calculate each person's certainty equivalent. What does value of the certainty equivalent tell you about how much each person would be willing to insure against their loss
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