Which insurance policy will the homeowner buy

Reference no: EM13186752

Suppose the typical Florida resident has wealth of $500,000, of which his or her home is worth $100,000. Unfortunately Florida is infamous for it hurricanes, and it is believe there is a 10 chance of a hurricane that could totally destroy a house (a loss of $100,000). However, it is possible to retrofit the house with various protective devices (shutters, roof bolts, and so on) for a cost of $2,000. This reduces the 10% chance of a loss of $100,000 to a 5% chance of a loss of $50,000. Thee homeowner must decide whether to retrofit and thereby reduce the expected loss. The problem for an insurance company is that it does not know whether the retrofit will be installed and therefore cannot quote a premium conditioned on the policyholder choosing this action. Nevertheless, the insurance company offers the following two policies from which the homeowner can choose: (1) the premium for insurance covering total loss is $12,000 or (2) the premium for insurance covering only 50% of loss is $1,500. The typical homeowner has a utility function equal to the square root of wealth. Will the homeowner retrofit the house, and which insurance policy will the homeowner buy? Will the insurance company make a profit (on average) given the homeowner's choice?

Reference no: EM13186752

Questions Cloud

What role does microeconomics play in business decisions : What role does microeconomics play in business decisions compared to macroeconomics. Can you assit me with a real life example that would show the impact on the decision making process of the business.

Identify the preferred project according to the criterion : An individual is considering two investment projects. Project A will return a zero profit if conditions are poor, a profit of $4 if conditions are good, and a profit of $8 if conditions are excellent. Project B will return a profit of $2 if condi..

Which investment should the individual choose : An individual has to choose between investment A and investment B. The individual estimates that the income an dprobability of the income from each investment are as given in the following table. Using Excel statistical tools, calculate the standar..

Offer a method for seperating the mixtures : Provide a method for seperating the mixtures of the compounds, dissolved in a solvent diethyl ether. In each case one of the components will be neutral compound. Give your answer in the form of flow chart.

Which insurance policy will the homeowner buy : Suppose the typical Florida resident has wealth of $500,000, of which his or her home is worth $100,000. Unfortunately Florida is infamous for it hurricanes, and it is believe there is a 10 chance of a hurricane that could totally destroy a house ..

Explain obtain the average weight of the crucible : Suppose four weighings of a crcucible were found to be 10.231 g, 10.278 g, 10.256 g, and 10.363. Obtain the average (mean) weight of the crucible

Recall from class that we estimated the pi bond in ethylene : Recall from class that we estimated the pi bond in ethylene to be about 350 kJ/mol. Use the same approach to estimate the strenghth

Do such announcements tend to discourage price cutting : The Boca Raton Company announces that if it reduces its price subsequent to a purchase, the early customer will get a rebate so that he or she will pay no more than those buying after the price reduction. a. If the Boca Raton Company has only o..

Calculate the opportunity loss or regret matrix : S&B Manufacturing Inc., a manufacturer of packaging products is attempting to select a short run strategy which maximizes the long run value of expected future profits. Their long run value will depend upon their competitor's response. The control..

User Account

All Pages