Multiple Choice
Jude owns a house worth $250,000 in an area that is prone to tornadoes. Suppose there is a 5 percent chance during the next year that Jude's house will incur $50,000 of damage from a tornado and a 1 percent chance that his home will be completely destroyed by a tornado. Suppose an insurance company offers him a policy that fully reimburses him in the event that his home is damaged by a tornado. The insurance company charges a $10,000 premium for this policy. Which of the following statements is true?The expected value of Jude's home when he buys insurance is higher than the expected value if he does not buy insurance.If Jude is risk neutral, he will prefer to not buy insurance.Economists would say it is irrational to purchase the insurance.
A) II only
B) I and III only
C) I only
D) II and III only
Correct Answer:
Verified
Correct Answer:
Verified
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