Michael lives on an island and owns a beach house worth $400,000. Of that, $100,000 is...

Michael lives on an island and owns a beach house worth $400,000. Of that, $100,000 is the cost of land and $300,000 is the cost of the structure. The probability that a hurricane destroys his house is 3 percent (he will still own the land). Michael can purchase hurricane insurance at the price of $2 for each $100 of coverage.

1. What is Michael’s contingent consumption bundle if Michael does not purchase insurance?

2. What is Michael’s contingent consumption bundle if Michael purchases $300,000 of insurance coverage?

3. Derive the equation of Michael’s budget constraint.

4. Plot Michael’s budget constraint on the graph.

Expert Solution

Rahul Sunny answered 2 years ago

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