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

question 101

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 = W^0.5.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:

Raw Materials

The basic, unprocessed resources or inputs used in the production of goods and services.

Labour

The human workforce involved in productive work, especially physical work, in an economy or for a specific project or company.

Profit Margins

measure the difference between the cost of producing a product or service and its selling price, expressed as a percentage of the sales price.

Maximum Amounts

The highest permissible or possible quantities or levels of something.