A person has an expected utility function of the form U(W) = W . He owns...

A person has an expected utility function of the form U(W) = W . He owns a house worth $ 500,000. There is a 50% chance that the house will be burned down. Then, he will become literally penniless . Luckily, however, there are insurance companies which make up for losses from house fire. Currently, they charge $q for $1 compensation (in cases of fire). In other words, the home owner should pay $qK for K units of fire insurance and he will be paid $K in case of fire.

Derive a demand function for the fire insurance. Discuss how it is related to q (a unit price of insurance).

Expert Solution

Rahul Sunny answered 2 years ago

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