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:

Good Performance

Refers to achieving or exceeding the set standards of tasks, duties, or goals efficiently and effectively.

Rewarded

Given a form of compensation or prize for one's effort, achievement, or behavior, serving as recognition and reinforcement.

Performance

A measure of how effectively a task or duty is executed within a given timeframe.

Intrinsic Rewards

Psychological or satisfaction-based rewards that individuals derive directly from engaging in an activity or task rather than from any external compensation.