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Scenario: Flood Area
Suppose that you own a home that is estimated to be worth $250 000.You live in a flood plain;as a result,the probability that you will lose your home to a flood is 30%.
-(Scenario: Flood Area)Use Scenario: Flood Area.Suppose that an insurance company offers you flood insurance.MOST likely,this insurance would require a premium payment:
A) greater than $250 000.
B) greater than $75 000.
C) less than $15 000.
D) equal to $100 000.

Question

Quizplus · Accepted Answer

Since the probability of losing the home to a flood is 30%, the insurance company will only offer coverage if the premium payment is greater than the expected value of the loss, which is $75,000 (30% of $250,000). Therefore, the premium payment is most likely to be greater than $75,000.

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