Assume that you own a lake house. Unfortunately your job will ...

[hubes95]

Assume that you own a lake house. Unfortunately your job will require that you spend the summer on the road and you won't be able to enjoy it. You decide that you will rent it out for the summer while you are working.
 
  The mortgage payment on the lake house is 1000 per month and the upkeep and maintenance if it is occupied is 200 month but zero if it is not rented. What is the minimum rent that you would be willing to receive and why? What information is irrelevant in your decision? Explain.

Question 2

In cases where a life insurance policy owner is not the same person as the insured, insurance companies often require that such purchases be for those with an insurable interest.
 
  For life insurance policies, close family members and business partners will usually be found to meet this test. In this case the purchaser is demonstrating that they would suffer an economic loss if the insured were to die. What economic argument could be made for why insurance companies would make such a restriction when it seems there might be a market for life insurance to people who wish to insure others for whom there is not such insurable interest?

[vickybb89]

Answer to Question 1

The minimum rent that you should be willing to receive would be 200 . Since this is in a sense your variable cost then this is all you would need in order to make it worthwhile to rent out. Anything less than 200 would make it more attractive to leave un-rented. The 1000 per month is irrelevant in your decision because it represents your fixed cost.

Answer to Question 2

The life insurance company may be considering that the person taking out such a policy is doing so because they believe the policyholder may have reason to know the insured may die soon. In this case the life insurance company would be taking on a policyholder who represents a higher risk. This type of restriction is an attempt to forestall the adverse selection problem.