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Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.

Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.

Algebra & Trigonometry with Analytic Geometry
Algebra & Trigonometry with Analytic Geometry
13th Edition
ISBN:9781133382119
Author:Swokowski
Publisher:Swokowski
Chapter7: Analytic Trigonometry
Section7.6: The Inverse Trigonometric Functions
Problem 91E
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Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.
Transcribed Image Text:Sandy owns a small business that would cost $150,000 to replace if it was ever destroyed by fire. There is a 0.20% chance that the business could be destroyed during the course of a year. Sandy's utility function is U=W0.50. How much would it cost for fair insurance that completely replaces the business if destroyed by fire? Assuming that Sandy has no other wealth, how much would Sandy be willing to pay for such an insurance policy? If there is a difference, explain why.
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