Helen just bought a house for $250,000. Earthquake insurance, which would pay $2

Question

Helen just bought a house for $250,000. Earthquake insurance, which would pay $250,000 in the event of a major earthquake, is available for $25,000. Helen estimates that the probability of a major earthquake in the coming year is 10 percent, and that in the event of such a quake, the property would be worth nothing. The utility (U) that Helen gets from income (I) is given as follows:  U(I) = (I/1000)2

Would Helen by insurance? Yes , No indifferent, or not enough information

What is the maximum she ould pay?

$9,762.18, $12,829.18, $37,552.24, or $45,530.56

Helen just bought a house for $250,000. Earthquake insurance, which would pay $250,000 in the event of a major earthquake, is available for $25,000. Helen estimates that the probability of a major earthquake in the coming year is 10 percent, and that in the event of such a quake, the property would be worth nothing. The utility (U) that Helen gets from income (I) is given as follows: U(I) = (I/1000)2

Explanation / Answer

There is not enough information for this qestion. As the income of Helen is not given hence the utility for the insurance cannot be determined. As the type of insurance selected is dependent upon the income of the person to get the differential between the money that one has and the money that they can give.

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