-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is
A) $10,000.
B) $20,000.
C) $30,000.
D) $40,000.

Question

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The minimum cost of insurance in this case is
A) $10,000. 
B) $20,000. 
C) $30,000. 
D) $40,000.

Quizplus · Accepted Answer

The minimum cost of insurance is the expected loss, which is 10% of the home's value, or $10,000.

-Van, Whose Utility of Wealth Curve Is Shown in the Above