For this? problem, use the fact that the expected value of an event is a probability weighted? average, the sum of each probable outcome multiplied by the probability of the event occurring.
You own a house worth $800,000 that is located on a river. If the river floods? moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a? seawall, the river would have to flood heavily to destroy your? house, which only happens about once every 100 years. What would be the annual premium without a seawall for an insurance policy that offers full? insurance?
Without a? seawall, the annual premium is?
?(Round your response to the nearest whole? number.)
What would be the annual premium with a seawall for an insurance policy that offers full? insurance?
With a? seawall, the annual premium is?
?(Round your response to the nearest whole? number.)
For a policy that only pays 75?% of the home? value, what are your expected costs without a? seawall?
Without a? seawall, the expected cost is?
?(Round your response to the nearest whole? number.)
For a policy that only pays 75% of the home? value, what are your expected costs with a? seawall?
With a? seawall, the expected cost is?
?(Round your response to the nearest whole? number.)
Do the different policies provide an incentive to be safer? (i.e., to build the? seawall)?