Your current disposable income is $10,000. There is a 10% chance of a storm damaging your home, causing damage that will cost $1900 to repair.
(There is a 90% chance that nothing will happen.) Your utility function is U = √ I where I is income.
Question1 : What is the fair price of an insurance policy that will cover the cost of damage to your home, in the event of a storm?
(a) $100 (b) $190 (c) $199 (d) $270
Question2 : If this policy is priced at $40, what is the change in your expected utility if you purchase the policy rather than no insurance?
(a) 1 (b) 0.8 (c) 0.2 (d) 0
Question3 : What is the most you would be willing to pay for this policy (rather than no insurance) ?
a) $100 (b) $190 (c) $199 (d) $270. Get Economics homework help today