Determine certainty equivalent, Risk Management

Ben owns a home in "tornado alley" in Oklahoma that is worth $100,000.  In any given year, he knows that there is a 1% chance his home will be hit by a tornado.  If it is, his home will be completely destroyed. 

      Ben's certainty equivalent of his uncertain prospect is $98,000.

a.   Graph Ben's utility of wealth function and the expected value of his uncertain prospect.  Label his expected utility and his certainty equivalent. 

b.   What is the maximum Ben will be willing to pay to insure his house?  Explain.

c.   Ben's town in Oklahoma is home to 999 other families, each of whom owns a $100,000 home that has a 1% chance of being destroyed and each of whom has preferences identical to Ben's.  The local insurance company is considering offering tornado insurance to the residents of the town.  It has determined that its administrative costs in providing such insurance would be $1,200 per policy.      

How many policies will be sold?  At what price?  Explain.

Posted Date: 2/25/2013 2:14:37 AM | Location : United States







Related Discussions:- Determine certainty equivalent, Assignment Help, Ask Question on Determine certainty equivalent, Get Answer, Expert's Help, Determine certainty equivalent Discussions

Write discussion on Determine certainty equivalent
Your posts are moderated
Related Questions
Question: Company XWS employs 220 workers. During an inspection exercise carried out by the relevant authority, it was found that the employer had not conducted its risk assess

Suppose you are running an international business and are concerned about converting foreign currencies (the Euro in particular) back into U.S. dollars in September. A) What po

challenges for risk management

Devise a disaster recovery plan • Business Impact Analysis • Treatment Strategies: o Risk Avoidance o Risk Reduction o Risk Transfer o Risk Retention • Ingredients of a disaster re

Problem: (a) What are the two primary stages of Risk Management of a project? (b) What are the formalities to consider in a Project Termination Phase? (c) Briefly explain

What is Industry Risk An industry may be viewed as group of companies which compete with each other to market a homogeneous product. Industry risk is that portion of an  inv

insurance is a pool of risk?discuss

Part 1: Contingency plan Create contingency plans for the following scenarios: > One of your highly qualified consultants has given three months notice and is planning to move to a

Question 1: (a) What are Upper Limb Disorders? (b) Describe seven main factors that are likely to increase the risk of upper limb disorders at work and suggest ways for redu

Macville Pty Ltd. Risk management case study