Assume that an insurance agent offers Charline an index insurance contract which is based on temperature (in general, seashell harvest is worse when temperatures are low). The insurance premium is $40. There are two possible values of temperature, LOW and HIGH. When temperature is LOW, the insurance company makes a payout of $100 to Charline. When temperature is HIGH, the insurance company doesn’t pay Charline anything. Like most index insurance contracts, this one is not perfect. Sometimes Charline would have a BAD seashell harvest even though temperature is HIGH and sometimes she would have a GOOD seashell harvest even though temperature is LOW. So there are four possible outcomes for Charline if she insures her business. Their probabilities are as follows:
Pr(LOW temperature and BAD harvest) = .30;
Pr(LOW temperature and GOOD harvest) = .10;
Pr(HIGH temperature and BAD harvest) = .10;
Pr(HIGH temperature and GOOD harvest) = .50
Which activity will Charline choose? (Open business without insurance, Open business with insurance, Economics tutor.