Reference no: EM132264191

Assume that an insurance agent offers Charline an index insurance contract which is based on temperature (in general, seashell harvest is worse when temperatures are low). The insurance premium is $40. There are two possible values of temperature, LOW and HIGH. When temperature is LOW, the insurance company makes a payout of $100 to Charline. When temperature is HIGH, the insurance company doesn't pay Charline anything. Like most index insurance contracts, this one is not perfect. Sometimes Charline would have a BAD seashell harvest even though temperature is HIGH and sometimes she would have a GOOD seashell harvest even though temperature is LOW. So there are four possible outcomes for Charline if she insures her business. Their probabilities are as follows:

Pr(LOW temperature and BAD harvest) = .30;

Pr(LOW temperature and GOOD harvest) = .10;

Pr(HIGH temperature and BAD harvest) = .10;

Pr(HIGH temperature and GOOD harvest) = .50

What is Charline's expected utility if she buys the insurance and opens the business?