Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buying earthquake insurance on your home at an annual cost of $180. The probability of an earthquake damaging your home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully covered by earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes your expected assets after one year.

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