Question
In: Economics
A firm wants to purchase fire insurance for its main factory. The probability of a fire...
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A firm wants to purchase fire insurance for its main factory. The probability of a fire in the factory without a fire-prevention program is 0.01; with a fire-prevention program the probability of a fire drops to 0.001. The fire-prevention programs costs $80 to run and a fire would result in a loss of $300,000. Suppose the firm is risk- neutral and the insurance company cannot observe whether or not it has implemented the fire-prevention program.
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Would the firm implement the fire-prevention program if insurance was unavail- able? Explain.
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How much would the firm be willing to pay to fully insure against the fire loss? Explain. Note: full insurance means that, in case of a fire, $300,000 is remitted to the firm.
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Solutions
Expert Solution
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Rahul Sunny answered 2 years agoRelated Solutions
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between the amount of fire damage and the distance between the
burning house and the nearest fire station. This information will
be used in setting rates for insurance coverage. For a sample of 30
claims for the last year, the director of the actuarial department
determined the distance from the fire station (x) and the amount of
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reported below.
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between the amount of fire damage and the distance between the
burning house and the nearest fire station. This information will
be used in setting rates for insurance coverage. For a sample of 30
claims for the last year, the director of the actuarial department
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be used in setting rates for insurance coverage. For a sample of 30
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claims for the last year, the director of the actuarial department
determined the distance from the fire station (X) and the
amount of fire damage, in thousands of dollars (Y). The
MegaStat output is reported below.
ANOVA table...
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