Burger Prince Restaurant Is Considering the Purchase of a $100,000

question 66

Essay

Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy.The fire statistics indicate that in a given year the probability of property damage in a fire is as follows: $$\begin{array} { l c c c c c c } \text { Fire Damage } & \$ 100,000 & \$ 75,000 & \$ 50,000 & \$ 25,000 & \$ 10,000 & \$ 0 \\\hline \text { Probability } & .006 & .002 & .004 & .003 & .005 & .980\end{array}$$
a.If Burger Prince was risk neutral, how much would they be willing to pay for fire insurance?
b.If Burger Prince has the utility values given below, approximately how much would they be willing to pay for fire insurance? $$\begin{array} { l c c c c c c c } \text { Loss } & \$ 100,000 & \$ 75,000 & \$ 50,000 & \$ 25,000 & \$ 10,000 & \$ 5,000 & \$ 0 \\\hline \text { Utility } & 0 & 30 & 60 & 85 & 95 & 99 & 100\end{array}$$

Understand and interpret utility functions and their implications for individual preferences.

Analyze competitive equilibrium in different market settings.

Describe the concept of Pareto optimality and its conditions in a two-person economy.

Recognize the function and interpretation of an Edgeworth box in analyzing resource allocation.

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Definitions:

Alternative Evaluation

The stage in the consumer decision-making process where individuals compare different products or brands they have identified as being capable of satisfying their need.

Postpurchase Behavior

The actions and reactions of consumers after purchasing a product or service, including satisfaction, regret, or loyalty.

Repeated Experience

A scenario in which an individual encounters the same event, activity, or situation multiple times, leading to familiarity or skill improvement.

Psychosocial Edification

The process of educating or improving an individual's psychological and social skills and knowledge for better interpersonal interactions and personal development.