Question: A family with utility from wealth equal to U(W) WAR owns a house worth $250,000.The house is located along the coast and each year there is one chance in a hundred that a hurricane will destroy the property. The house is the family's only possession.
a) What is the family's absolute measure of risk aversion? Would that measure be higher, the same or lower ifthe family's house was worth S500,000? The family is offered an insurance policy that for a yearly premium of $1,996 covers up to $163,600 in damages.
b) Does the policy offer full coverage? Justify your answer.
c) Is the policy actuarially fair? Briefly explain.
d) Will the family buy the policy?
e) What is the highest premium the family is willing to pay for a full coverage policy?