(Answered) A family owns a house worth 250000 and believes that the

Management Studies

A family owns a house worth $250,000 and believes that the probability that a fire will house burn to the ground (complete loss) is 0.1% (or 0.001). Use this information to answer the following questions.

(a) If the family own no other assets than this house, what is the expected value of their asset?

(b) If the family had $25,000 sitting in a FDIC insured savings account, what would the expected value of their assets be?

(c) If this family was offered a homeowner's insurance policy that included coverage for loss due to fire, how much would they be willing to pay to cover their home completely? (Their reservation premium should leave them indifferent between insuring or not.)

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