Domingo has total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box,so that it is completely safe.However,there is a 10% chance that his house will burn down and be worth nothing and a 90% chance that nothing will happen to it.Domingo buys insurance guaranteeing that his house will be restored to its original condition should anything happen to it.The insurance premium is $2,000.Consequently (assuming other things remain unchanged),his future:
A)expected wealth is $480,000.
B)wealth is $500,000 for sure.
C)expected wealth is $490,000.
D)wealth is $498,000 for sure.

Question

Quizplus · Accepted Answer

With insurance, Domingo pays a $2,000 premium, ensuring his house is protected against the risk of fire. This means his total wealth is $500,000 (house + cash) minus the $2,000 insurance premium, equaling $498,000, with no risk of losing his house value.

Domingo Has Total Wealth of $500,000 Composed of a House