Expected Utility-Econ

posted by .

Suppose that your wealth is $250,000. You buy a $200,000 house and invest the remainder in a risk-free asset paying an annual interest rate of 6 percent. There is a probability of 0.001 that your house will burn to the ground and its value will be reduced to zero. With a log utility of end-of-year wealth, how much would you be willing to pay for insurance (at the beginning of the year)? Assume that if the house does not burn down, its end-of-year value still will be $200,000.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. economics

    (Insurance) Let X = R+. Consider a house owner whose house has a risk of burning down with probability 0.001. If the house burns down it is worth $0 otherwise it is worth $1 million. The owner of the house is an expected utility maximizer …
  2. accounting

    House mortgage You have just purchased a house and have obtained a 30-year, $200,000 mortgage with an interest rate of 10 percent. Required: a. what is your annual payment?
  3. fiance

    You want to create a $75,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and stock B has an expected return of 11.4 percent. You want to own $30,000 of stock B. The risk-free …
  4. fiance

    Sonny owns $5,000 worth of High Risk Enterprises (HRE) stock. HRE has a standard deviation of 16 percent and a beta of 2.0. He wants to invest another $5,000 and create a $10,000 portfolio that is equally as risky as the overall market. …
  5. Math

    Sonny owns $5,000 worth of High Risk Enterprises (HRE) stock. HRE has a standard deviation of 16 percent and a beta of 2.0. He wants to invest another $5,000 and create a $10,000 portfolio that is equally as risky as the overall market. …
  6. math/stock

    You want to create a $75,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and stock B has an expected return of 11.4 percent. You want to own $30,000 of stock B. The risk-free …
  7. Investing

    Sonny owns $5,000 worth of High Risk Enterprises (HRE) stock. HRE has a standard deviation of 16 percent and a beta of 2.0. He wants to invest another $5,000 and create a $10,000 portfolio that is equally as risky as the overall market. …
  8. accounting

    You have just purchased a house and have obtained a 30-year, $200,000 mortgage with an interest rate of 10 percent. Required: a. what is your annual payment?
  9. Finance

    Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. Assume you get a 15-year mortgage with a 6 percent interest rate. If the house appreciates at a 2 percent rate per year, …
  10. maths

    Suppose that you want to buy a house 5 years from now, and you estimate that an initial down payment of $30,000 will be required at that time. To accumulate the $30,000, you wish to make equal annual end of year deposits into an account …

More Similar Questions