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Willy's only source of wealth is his chocolate factory. He has the utility function given by PVCF +(1 – p) /Cnfs where p is the probability of a flood, 1 - p is the probability of no flood, and Cf and Cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/44*x whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy

Willy's only source of wealth is his chocolate factory. He has the utility function given by PVCF +(1 – p) /Cnfs where p is the probability of a flood, 1 - p is the probability of no flood, and Cf and Cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/44*x whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy

A First Course in Probability (10th Edition)
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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Willy's only source of wealth is his chocolate factory. He has the utility function given by PVC5 + (1 – p) Jenf, where p is the probability of a flood, 1 - p is the probability of no flood, and Cf and Cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/44*x whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy the coverage of $350,000. no insurance. the coverage of $450,000. the coverage of $550,000. There is not enough information to determine whether Willy should buy insurance or not.
Transcribed Image Text:Willy's only source of wealth is his chocolate factory. He has the utility function given by PVC5 + (1 – p) Jenf, where p is the probability of a flood, 1 - p is the probability of no flood, and Cf and Cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/44*x whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy the coverage of $350,000. no insurance. the coverage of $450,000. the coverage of $550,000. There is not enough information to determine whether Willy should buy insurance or not.
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