Question

In: Statistics and Probability

You own a house that is valued at $500,000. The probability of a house fire in...

You own a house that is valued at $500,000. The probability of a house fire in your area is 0.0002, and if a house fire happens, your home’s value will be reduced to $0. You are considering buying an insurance for your house. In case of fire, the insurance company will pay you $300,000. Ignore depreciation, taxes, etc. of your house in the following calculations. What is the expected values of your home without insurance and your home if the insurance is free?

Solutions

Expert Solution

Solution:

The expected value of your home without insurance is:

Therefore, the expected value of your home without insurance is -$100

The expected value of your home with free insurance is:

Therefore, the expected value of your home with free insurance is $60

orchestra answered 2 years ago
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