You now have constructed a utility function that measures how much you value having total assets worth x dollars (x ≥ 0). This utility function is U(X)=√x. Compare the utility of reducing your total assets next year by the cost of the earthquake insurance with the expected utility next year of not taking the earthquake insurance. Should you take the insurance?
You now have constructed a utility function that measures how much you value having total assets worth x dollars (x ≥ 0). This utility function is U(X)=√x. Compare the utility of reducing your total assets next year by the cost of the earthquake insurance with the expected utility next year of not taking the earthquake insurance. Should you take the insurance?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
Related questions
Question
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.
Transcribed Image Text:You now have constructed a utility function that measures how much you value having
total assets worth x dollars (x ≥ 0). This utility function is U(X)=√x. Compare the utility of
reducing your total assets next year by the cost of the earthquake insurance with the
expected utility next year of not taking the earthquake insurance. Should you take the
insurance?
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