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Suppose Sara is risk averse and wants to insure her​ store, which is worth ​$120,000. There...

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Economics

  1. Suppose Sara is risk averse and wants to insure her​ store,which is worth ​$120,000. There is a 25% probability that her storewill burn next year. If a fire​ occurs, the store will be worthonly ​$60,000. The local government assesses a property tax of​$4,000 on​ Sara's store. If the tax is collected whether or notthe store​ burns, how much fair insurance does Sara​ buy? If thetax is collected only if the store does not​ burn, how much fairinsurance does Sara buy?
  2. What type of risk behavior does the person exhibit who iswilling to pay $5 for the chance to bet $60 on a game where 20% ofthe time the bet returns $100, and 80% of the time returns $50?Explain.

Answer & Explanation Solved by verified expert
4.1 Ratings (540 Votes)
Answer given price of store 120000 Probability of burn 25 Price of store after burn 60000 Property tax 4000 1 There is 25 probability that she will have store worth 60000 and 75 probability that she will have store worth    See Answer
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