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Obtain the Expected Monetary Value

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Question - A homeowner has a home worth $ 300,000, and some financial investments worth $ 100,000.

There are no loans against the home, so a decision must be made with respect to buying homeowner's insurance to protect against loss by fire. Such a policy would cost $2000/year. Assume the risk of a fire is 0.005 in a year, and if a fire occurs it would be a total loss. There is no deductible (self-participation) when a loss occurs. Assume the homeowner's utility of wealth function is given by u(W) = log10(W + 200) where the log function is base 10 (the default for the "log" function in Excel), and wealth is measured in thousands of dollars. For example, if the wealth is $ 600,000, the utility would be log10(600 + 200) = log10(800) = 2.90309.

Obtain the Expected Monetary Value (EMV) for this uncertain situation (lottery). Express answer in dollars (not thousands).

Reference no: EM132782382

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