Johnny Owns a House That Would Cost $100,000 to Replace

question 84

Essay

Johnny owns a house that would cost $100,000 to replace should it ever be destroyed by fire.There is a 0.1% chance that the house could be destroyed during the course of a year.Johnny's utility function is ?U = W⁰.⁵.How much would fair insurance cost that completely replaces the house if destroyed by fire? Assuming that Johnny has no other wealth,how much would Johnny be willing to pay for such an insurance policy? Why the difference?

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Definitions:

Self-Organizing Group

A group that forms and organizes itself naturally based on common interests or goals, often without a formal leadership structure.

Primary Group

A small social group characterized by close, personal, and enduring relationships, often significant in the development of social identity.

Shortest Duration

The minimum length of time that occurs from the start to the finish of a given event or process.

Personal Groups

Collections of individuals with whom one has personal relationships, characterized by direct interactions and emotional connections.