In Eugene, Oregon, Next Year There Is a 2% Chance

question 10

Multiple Choice

In Eugene, Oregon, next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property. Quincy, who has $3,000,000 in buildings and personal property, has the opportunity to purchase complete earthquake insurance. Which is true?

• A) Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's all he could possibly lose in an earthquake.
• B) Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's his expected loss in an earthquake.
• C) If Quincy buys earthquake insurance, and an earthquake does not occur, he will have received no utility from the transaction.
• D) What Quincy is willing to pay for the earthquake insurance depends upon his degree of risk aversion.
• E) Quincy should be willing and able to pay up to $3,000,000 for earthquake insurance.

---

Definitions:

Bubbles

Refers to a situation in which asset prices are significantly higher than their intrinsic values, often due to speculative trading.

Rice Wine

An alcoholic beverage made from the fermentation of rice, commonly consumed in East Asia and Southeast Asia.

Software Developer

A professional who designs, tests, and maintains software programs and applications.

Personal Finance Software

Computer programs that help individuals manage their financial accounts and investments, track spending, and budget.