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Your current disposable income is $90,000. Suppose that there is a 1% chance that your house may burn down, and if it does, the cost of repairing it will be $80,000, reducing your disposable income to $10,000. Suppose that your utility function is U = √I

(a) Would you be willing to spend $500 to purchase an insurance policy that would fully insure you against your loss?

(b) What is the highest price that you would be willing to pay for an insurance policy that fully insures you in the event that your house burns down?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9167569

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