3. Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire statistics indicate that in a given year the probabilit of property damage in a fire is as follows: Fire $100,00 $75,000 $50,000 $25,000 $10,000 $0 Damage Probability .006 .002 .004 .003 .005 .980 a. If Burger Prince was risk neutral, how much would they be willing to pay for fire insurance? b. If Burger Prince has the utility values given below, approximately how much would they be willing to pay for fire insurance? Amount of $100,0 $75,00 $50,00 $25,00 $10,00 $5,000 $0 Loss 00 Utility 30 60 85 95 99 100

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3. Burger Prince Restaurant is considering the purchase of a $100,000 fire
insurance policy. The fire statistics indicate that in a given year the probability
of property damage in a fire is as follows:
Fire
$100,00 $75,000 $50,000 $25,000 $10,000
$0
Damage
Probability
.006
.002
.004
.003
.005
.980
a. If Burger Prince was risk neutral, how much would they be willing to pay for
fire insurance?
b. If Burger Prince has the utility values given below, approximately how much
would they be willing to pay for fire insurance?
Amount of
$100,0 $75,00 $50,00 $25,00 $10,00 $5,000
$0
Loss
00
Utility
30
60
85
95
99
100
Transcribed Image Text:3. Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire statistics indicate that in a given year the probability of property damage in a fire is as follows: Fire $100,00 $75,000 $50,000 $25,000 $10,000 $0 Damage Probability .006 .002 .004 .003 .005 .980 a. If Burger Prince was risk neutral, how much would they be willing to pay for fire insurance? b. If Burger Prince has the utility values given below, approximately how much would they be willing to pay for fire insurance? Amount of $100,0 $75,00 $50,00 $25,00 $10,00 $5,000 $0 Loss 00 Utility 30 60 85 95 99 100
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