Expected UtilityEcon
posted by Julia .
Suppose that your wealth is $250,000. You buy a $200,000 house and invest the remainder in a riskfree 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 endofyear 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 endofyear value still will be $200,000.
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