-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's cost of risk?
A) $10,000
B) $20,000
C) $30,000
D) $40,000

Question

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's cost of risk?
A) $10,000 
B) $20,000 
C) $30,000 
D) $40,000

Quizplus · Accepted Answer

The cost of risk is calculated as the expected loss due to the risk. With a 20% chance of losing a $50,000 house, the expected loss is 0.20 * $50,000 = $10,000.

-The Above Figure Shows the Utility of Wealth Curve for a Homeowner