SOLVED

11) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice’s utility of wealth schedule is given in the table above. What is Beatrice’s expected utility of wealth? A) between 0 and 200 B) 245 C) 270 D) between 287 and 300 12) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice’s utility of wealth schedule is given in the table above. What is the minimum amount that the insurance company would require Beatrice to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? (Assume the insurance company has no other costs.) A) $10,000 B) $30,000 C) $40,000 D) $60,000 13) Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be destroyed by a hurricane. Beatrice’s utility of wealth schedule is given in the table above. What is the maximum amount that Beatrice would be willing to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? A) $10,000 B) $30,000 C) $40,000 D) $60,000 14) Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is A) $10,000. B) $20,000. C) $30,000. D) $40,000. 15) Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. Initially there is a 10 percent chance that the house will be destroyed by hurricane. As the risk of destruction due to hurricane rises from 10 percent to 20 percent, the minimum cost of insurance A) stays the same. B) increases by $10,000. C) increases by $20,000. D) increases by $30,000. 16) Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The value of insurance to Van is A) $10,000. B) $15,000. C) $20,000. D) $30,000. 17) Bruce Copperwood’s utility of wealth curve is illustrated in the above figure. Bruce is presently employed at a salary of $100,000. There is a 10 percent probability that Bruce will be totally disabled, in which case he will have no wealth. The maximum amount that Bruce is willing to pay for a disability insurance policy that would pay him $100,000 in the case of total disability is A) $10,000. B) $20,000. C) $80,000. D) None of the above answers is correct. 18) Bruce Copperwood’s utility of wealth curve is illustrated in the above figure. Bruce is presently employed at a salary of $100,000. There is a 10 percent probability that Bruce will be totally disabled, in which case he will have no wealth. An insurance company (with no operating expenses) would be willing to offer Bruce a disability insurance policy paying $100,000 in the case of total disability for a minimum premium of A) $1,000. B) $10,000. C) $20,000. D) None of the above answers is correct. 19) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve’s utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company’s insurance policy. The company’s operating expenses are $500 per policy. With no insurance, Steve’s expected wealth is A) $4,000 B) $4,500 C) $3,500 D) $5,000 20) Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve’s utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company’s insurance policy. The company’s operating expenses are $500 per policy. With no insurance, Steve’s expected utility is A) 97 B) 84 C) 90 D) 100