Johnny owns a house that would cost $100,000 to replace should it ever be destroyed by fire. There is a 0.1% chance that the house could be destroyed during the course of a year. Johnny's utility function is U = W0.5
How much would fair insurance cost that completely replaces the house if destroyed by fire? Assuming that Johnny has no other wealth, how much would Johnny be willing to pay for such an insurance policy? Why the difference?
Fair insurance would cost (0.001 ? $100,000 ) = $100. Johnny's expected utility without insurance equals (.001 ? 00.5 ) + (.999 ? 100,0000.5 ) = 315.91. He can receive this level of utility with certainty if he had risk-free wealth of $99,800.10. Thus he is willing to pay $199.90 for insurance. He is willing to pay more than the fair price because he is risk averse.
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One important difference between the international economy of today and the economy of 100 years ago is
A) that labor is so much more mobile. B) for the first time, technological innovations have reduced the barrier of distance. C) for the first time, capital is mobile. D) that price differences in different markets have narrowed. E) the presence of international bodies such as the IMF and World Bank.
Which of the following is consistent with international trade theory?
A) The United States needs trade restrictions to stay competitive. B) The United States has been falling behind Europe and Japan because its economy is too open. C) The standard of living within a country is a function of the economic strength of the economy and not of its relative position. D) A country should strive for comparative advantage in manufacturing.