Domingo Has Total Wealth of $500,000 Composed of a House

question 118

Multiple Choice

Domingo has total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box, so that it is completely safe.However, there is a 10% chance that his house will burn down and be worth nothing (and a 90% chance that nothing will happen to it) .Domingo buys insurance that guarantees that his house will be restored to its original condition should anything happen to it.The insurance premium is $2,000.Consequently (assuming other things remain unchanged) , his future:

• A)expected wealth is $480,000.
• B)wealth is $500,000 for sure.
• C)expected wealth is $490,000.
• D)wealth is $498,000 for sure.

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