Jackson owns a house worth $350,000 in an area that is prone to hurricanes. Suppose there is a 12 percent chance during the next year that Jackson's house will incur $25,000 of damage from a hurricane and a 2 percent chance that his home will be completely destroyed by a hurricane. Suppose an insurance company offers him a policy that fully reimburses him in the event that his home is damaged by a hurricane. The insurance company charges a $10,000 premium for this policy. Which of the following statements is true? If Jackson is risk averse, he will definitely buy the insurance. The expected value of Jackson's house if he purchases the insurance is $340,000. The expected value of Jackson's house if he does not purchase the insurance is $340,000.
A) II only
B) I and III only
C) III only
D) I, II, and III
Correct Answer:
Verified
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