-The Above Figure Shows the Utility of Wealth Curve for a Homeowner

question 230

Multiple Choice

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, the highest price for insurance this person would pay is

• A) $0.
• B) $5,000.
• C) $10,000.
• D) $20,000.

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Definitions:

Risk-loving

Refers to a preference for risk when making choices under uncertainty, where a greater level of risk is associated with the potential for higher rewards.

Negative Expected Value

A statistical condition where the anticipated result of an investment is less than the initial cost.

Moral Hazard

The risk that one party to a transaction has not entered into the contract in good faith or has an incentive to take unusual risks because the costs are not borne by that party.

Flat Salary

A flat salary is a fixed amount of pay received by an employee, regardless of the number of hours worked or the quantity of output.