Joe and Jack both own a holiday house on the south coast and both have a utility function the same as Ted’s. Joe has a starting wealth of 2 million dollars, Jack has an a starting wealth of 600 thousand dollars. There’s a 7% chance of a bushfire that will destroy their houses causing each of them to lose $500,000. An insurance policy to cover bushfire damage is on offer in the market, but it has a $80,000 excess. (Only amounts of loss greater than the excess are covered by the insurance contract, in other words, the person who buys the insurance policy has to cover the cost of the first $80,000 of damage and the company pays the rest.) The cost for insurance for the flood damage is $50,000.
(d) Do Joe and/or Jack buy insurance?
(e) If the premium was not fixed at $50,000, what is the maximum amount Joe and Jack would pay for the insurance?