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Willy's Only Source of Wealth Is His Chocolate Factory

Question 27

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Willy's only source of wealth is his chocolate factory. He has the utility function pc Willy's only source of wealth is his chocolate factory. He has the utility function pc <sup> </sup> <sub>f</sub> + (1 - p) c <sup> </sup> <sub>nf</sub>, where p is the probability of a flood, 1 - p is the probability of no flood, and c<sub>f</sub> and c<sub>nf</sub> are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of Willy's factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy A) no insurance since the cost per dollar of insurance exceeds the probability of a flood. B) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood.. C) enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not. D) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood. E) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood f + (1 - p) c Willy's only source of wealth is his chocolate factory. He has the utility function pc <sup> </sup> <sub>f</sub> + (1 - p) c <sup> </sup> <sub>nf</sub>, where p is the probability of a flood, 1 - p is the probability of no flood, and c<sub>f</sub> and c<sub>nf</sub> are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of Willy's factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy A) no insurance since the cost per dollar of insurance exceeds the probability of a flood. B) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood.. C) enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not. D) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood. E) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood
nf, where p is the probability of a flood, 1 - p is the probability of no flood, and cf and cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = Willy's only source of wealth is his chocolate factory. He has the utility function pc <sup> </sup> <sub>f</sub> + (1 - p) c <sup> </sup> <sub>nf</sub>, where p is the probability of a flood, 1 - p is the probability of no flood, and c<sub>f</sub> and c<sub>nf</sub> are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of Willy's factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy A) no insurance since the cost per dollar of insurance exceeds the probability of a flood. B) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood.. C) enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not. D) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood. E) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood . The value of Willy's factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company Willy's only source of wealth is his chocolate factory. He has the utility function pc <sup> </sup> <sub>f</sub> + (1 - p) c <sup> </sup> <sub>nf</sub>, where p is the probability of a flood, 1 - p is the probability of no flood, and c<sub>f</sub> and c<sub>nf</sub> are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of Willy's factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy A) no insurance since the cost per dollar of insurance exceeds the probability of a flood. B) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood.. C) enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not. D) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood. E) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy


A) no insurance since the cost per dollar of insurance exceeds the probability of a flood.
B) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood..
C) enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not.
D) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood.
E) enough insurance so that if there is a flood, after he collects his insurance, his wealth will beof what it would be if there were no flood

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