4. Consider an office that there are some valuables which worth $250,000 (books and pipe dreams). This office faces a 0.30 probability of a burglary since the office is in Turkey. If a burglary were to occur, the officers would have to spend $100,000 to replace the stolen items. Suppose it can buy an insurance policy for $20,000 that would fully reimburse it for the amount of the loss. a) Should officers buy this insurance policy? b) Should it buy the insurance policy if it cost $25,000? $35,000? c) What is the most officers would be willing to pay for this insurance policy? How does your answer relate to the concept of risk premium discussed in the text?
4. Consider an office that there are some valuables which worth $250,000 (books and pipe dreams). This office faces a 0.30 probability of a burglary since the office is in Turkey. If a burglary were to occur, the officers would have to spend $100,000 to replace the stolen items. Suppose it can buy an insurance policy for $20,000 that would fully reimburse it for the amount of the loss. a) Should officers buy this insurance policy? b) Should it buy the insurance policy if it cost $25,000? $35,000? c) What is the most officers would be willing to pay for this insurance policy? How does your answer relate to the concept of risk premium discussed in the text?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:4. Consider an office that there are some valuables which worth $250,000 (books and pipe
dreams). This office faces a 0.30 probability of a burglary since the office is in Turkey. If
a burglary were to occur, the officers would have to spend $100,000 to replace the stolen
items. Suppose it can buy an insurance policy for $20,000 that would fully reimburse it
for the amount of the loss.
a) Should officers buy this insurance policy?
b) Should it buy the insurance policy if it cost $25,000? $35,000?
c) What is the most officers would be willing to pay for this insurance policy? How
does your answer relate to the concept of risk premium discussed in the text?
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