-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 completely destroyed, would this homeowner buy insurance?
A) No, because the homeowner is not risk averse.
B) Yes, at any price because the homeowner is risk averse.
C) Yes, but only if it costs less than $10,000.
D) Yes, but only if it costs less than $20,000.

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 completely destroyed, would this homeowner buy insurance?
A) No, because the homeowner is not risk averse. 
B) Yes, at any price because the homeowner is risk averse. 
C) Yes, but only if it costs less than $10,000. 
D) Yes, but only if it costs less than $20,000.

Quizplus · Accepted Answer

The expected loss from the 20% chance of destruction is $10,000 (20% of $50,000). A risk-averse homeowner would be willing to pay up to $20,000 for insurance to avoid the risk, as the utility of certain wealth is higher than the expected utility of uncertain wealth.

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