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Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.

Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.

MATLAB: An Introduction with Applications
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
Problem 1P
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Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.
Transcribed Image Text:Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.
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