Suppose Sara is risk averse and wants to insure her store,which is wor...

Suppose Sara is risk averse and wants to insure herâ€‹ store, which is worth â€‹$120,000. There...

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Economics

Suppose Sara is risk averse and wants to insure herâ€‹ store,which is worth â€‹$120,000. There is a 25% probability that her storewill burn next year. If a fireâ€‹ occurs, the store will be worthonly â€‹$60,000. The local government assesses a property tax ofâ€‹$4,000 onâ€‹ Sara's store. If the tax is collected whether or notthe storeâ€‹ burns, how much fair insurance does Saraâ€‹ buy? If thetax is collected only if the store does notâ€‹ burn, how much fairinsurance does Sara buy?
What type of risk behavior does the person exhibit who iswilling to pay $5 for the chance to bet $60 on a game where 20% ofthe time the bet returns $100, and 80% of the time returns $50?Explain.

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Answer given price of store 120000 Probability of burn 25 Price of store after burn 60000 Property tax 4000 1 There is 25 probability that she will have store worth 60000 and 75 probability that she will have store worth See Answer

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