What is her reservation price for the insurance

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Question - Susan lives in Vancouver, BC. She is concerned about the possibility of an earthquake and is now considering purchasing earthquake insurance to protect the value of her home, which is worth $700,000. The probability that an earthquake of low severity will occur in a given year is 0.01. If it occurs, the damage is expected to be $100,000. The probability that an earthquake of high severity will occur in a given year is 0.003. If it occurs, the damage is expected to be $500,000.

Susan's current liquid net worth is $800,000. Her preferences can be represented by the utility function U (W) = ln (W).

Required -

a) What will be her expected utility if she does not buy the insurance?

b) What is her reservation price for the insurance?

Reference no: EM133092657

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