Insurance
Your house is worth $40,000 and the price of housing is not changing. Currently, you have $30,000 in a savings account that pays no interest. There is a 1.25 percent chance of a fire during the next year. If the fire occurs, there will be $30,000 worth of damage. If you do not purchase insurance and a fire occurs, you will pay $30,000 to repair your house. What is the expected value of your wealth (including the value of your home and your savings account) at the end of the year?
An insurance company offers you a fire insurance policy. If a fire occurs, it will pay to repair your home. The fire insurance is fair if the premium for the policy equals the expected value of the claim the insurance policy will have to pay. What premium would you pay for a fair insurance policy?
Please round your final answer to two decimal places.
◦ $69,625.00, $375.00
◦ $68,625.00, $29,625.00
◦ $68,625.00, $375.00
◦ $69,625.00, $29,625.00
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