Bob's farm harvests corns worth 102 thousand dollars (and nothing else). In each year, there is a 20% chance that a storm will attack and leaves him with only 24 thousand dollars worth of the corns. Bob's preferences over wealth are represented by U = In w. What is the maximum that Bob is willing to pay for full insurance (in unit of thousand dollars)? Please round your answer to the nearest integer.

Bob's farm harvests corns worth 102 thousand dollars (and nothing else). In each year, there is a 20% chance that a storm will attack and leaves him with only 24 thousand dollars worth of the corns. Bob's preferences over wealth are represented by U = In w. What is the maximum that Bob is willing to pay for full insurance (in unit of thousand dollars)? Please round your answer to the nearest integer.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 5PA

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The Healthcare Managers Team Challenge Question: Considering the same graph above, and assume that the probability of a hurricane in Springfield is 23% this coming summer: a) calculate the expected wealth and utility of the Simpson's residence; b) explain why Homer Simpson is likely to buy insurance, or why he might not be wanting to buy insurance. Note that if the hurricane takes place the value of the Simpsons' wealth will be $10,000. but if there is no hurricane, their wealth will remain at $20,000.
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