Question

Consider the following statements when answering this question: 1. Without fire insurance, the expected value of homeownership for a risk-averse homeowner is SW. Insurance companies are willing to sell this homeowner a policy that guarantees the homeowner a wealth of SW II. In a neighborhood where the price of houses are identical, the probability of a fire is identical, and the value of damage done by fires is identical, the risk premium for an insurance policy that repays all the cost of the fire damage does not vary across homeowners. CA. 1 is false, and Il is true B. I is true, and II is false C. I and I are true * I and I are false

Answer 1

Answer—I and II are false

A risk-averse individual has a diminishing marginal utility of pay and favors a specific income to a gamble with the equivalent expected income. A risk lover has an increasing marginal utility of income and inclines toward an uncertain income to a certain income when the expected value of the uncertain income equals a certain income.