-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the minimum amount that the insurance company would require Beatrice to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? (Assume the insurance company has no other costs.)
A) $10,000
B) $30,000
C) $40,000
D) $60,000

Question

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is the minimum amount that the insurance company would require Beatrice to pay for an insurance policy that pays $100,000 if her beach house is destroyed by a hurricane? (Assume the insurance company has no other costs.)
A) $10,000 
B) $30,000 
C) $40,000 
D) $60,000

Quizplus · Accepted Answer

The minimum amount the insurance company would require is the expected loss, which is 10% of $100,000, equaling $10,000.

-Beachcomber Beatrice Spent Her Entire Wealth of $100,000 to Build