Megan is trying to decide whether to buy house insurance for her home in Miami.Her house is worth $200,000 and analysts have determined that the average loss from a Hurricane could be $45,000.They have also determined there is a 50 percent chance that she will face a hurricane.Suppose Megan is a risk averse person with a utility-of-income function such as the one given above.If the policy costs $22,500, Megan will

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Megan is risk-averse, which means she prefers a certain outcome over an uncertain one. In this case, the risk of facing a hurricane and incurring a loss of $45,000 is uncertain, and Megan would prefer to avoid it. The expected value of her loss is (0.5 x $45,000) = $22,500. The cost of insurance is also $22,500. Therefore, buying insurance would give her a certain outcome of paying $22,500, which she may prefer over the uncertain outcome of either no loss or a loss of $45,000. Hence, Megan should buy the insurance.

Megan Is Trying to Decide Whether to Buy House Insurance