Smith just bought a house for $250,000. Earthquake insurance, which would pay $2

Question

Smith just bought a house for $250,000. Earthquake insurance, which would pay $250,000 in the event of a major earthquake, is available for $25,000. Smith estimates that the probability of a major earthquake in the coming year is 10 percent, and that in the event of such a quake, the property would be worth nothing. The utility (U) that Smith gets from income (I) is given as follows: Should Smith buy the insurance? Smith is indifferent. No. Yes. We need more information on Smith's attitude toward risk.

Explanation / Answer

c

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