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Semmy [17]
2 years ago
10

A decision-maker faces the following decision under conditions of uncertainty. This decision-maker has $1 million in assets. Mos

t of those assets, $750,000, are the individual’s equity in his house. The remaining $250,000 are absolutely secure. Unhappily, there is a risk that the individual’s house will burn down in a fire, which would be a total loss of the $750,000. The individual can insure his house against the loss from this fire. The premium for the insurance is $40,000, and it will insure the individual completely; that is, if the individual chooses to purchase this insurance policy, his assets will be $960,000, whether or not there is a fire. (There is no mortgage on the house, so $750,000 is the full amount paid by the insurance company.) The probability of a fire is 0.05.
Required:
a. What is the expected net earnings, the premium less the expected amount paid out to the client, to the insurance company from this policy?
b. If the individual in question were risk neutral, would he buy this insurance policy?
c. If the individual in question is an expected utility maximizer, with the utility function u(a) = where a is the individuala's total assets, would this individual buy the insurance?
Business
2 answers:
denis-greek [22]2 years ago
6 0

A- The net earnings of the individual in question will be $710000 after the individual's claim for loss by fire is settled by the insurance company. B- Yes, he would buy the insurance if he were risk neutral.

C- Yes, the individual will buy the insurance policy if he were a expected utility maximizer as he would want to claim complete settlement of this amount to be claimed in case of fire loss.

  • The expected net earnings from the insurance after deducting the amount from the premium paid and total claim endorsed by the insurance company will be $710000 which can be shown as below

\rm Net\ earnings= claim\ received - premium\ of\ policy

\rm Net\ earnings= 750000-40000

We get,

\rm Net\ earnings= 710000

  • If the individual were risk neutral he would like to take the insurance as the risk of fire in the example given above is 0.5 which is greater than zero and this ultimately implies that <u>risk cannot be taken.</u>

  • In the case if the individual is expected utility maximizer he would take the insurance as it would not only give him the claims from losses due to fire but also help him secure his house against beta of fire.

Hence, the correct answers will be A- $710000; B- Yes.; C- Yes. and imply that taking insurance will be a wise decision by the individual.

To know more about insurance policy , click the link below.

brainly.com/question/24984403

OlgaM077 [116]2 years ago
5 0

Answer:

The correct Answer Is C,

Explanation:

I got It Right :)

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Explanation:

For computing the ending balance, first we have to compute the cost of inventory which is available for sale

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Now the ending inventory would be

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8 0
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Answer:

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Base on the scenario been described in the question, yes of cause, Manuel was the holder and Patricia agreed that she signed the note. For this reason, Manuel has the right to recover the note unless Patricia established another defense. Since no defense was given, it was not useful whether Manuel was a holder in due course, against whom certain defenses could not be given.

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On January 1, 2018, the Allegheny Corporation purchased machinery for $115,000. The estimated service life of the machinery is 1
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Answer:

Instructions are listed below

Explanation:

Giving the following information:

Machine costs= $115,000.

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straight line depreciation= (115000 - 5000)/10= 11000

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8 0
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Answer:

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