What is the insurance company's break even price for a one year theft insurance policy for an apartment without a security system?

Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.2IP
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An insurance company would like to offer theft insurance for renters. The policy would
pay the full replacement value of any items that were stolen from the apartment. Some
apartments have security alarms installed. Such systems detect a break-in and ring an alarm
within the apartment. The insurance company estimates that the probability of a theft in a
year is .05 if there is no security system and .01 if there is a security system (there cannot be
more than one theft in any year). An apartment with a security system costs the renter an
additional £50 per year. Assume that the loss from a theft is £10,000 and that the insurance
company is risk neutral and the renter would be willing to pay more than the expected loss to
insure against the loss of theft.

 

What is the insurance company's break even price for a one year theft insurance policy for an
apartment without a security system?

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