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22 February, 15:37

Walther owns a home in flood-prone Paradise Basin. If there is no flood the home and land together will be worth $2100. If there is a flood, Walther's home will be destroyed but the land will still be worth $800. There is 1/10 of chance that Walther's house will be destroyed by the flood. Walther can buy flood insurance for $0.2 per dollar of coverage. Let CF and CNF be the value of respective values of his land in the case of a flood or no flood. Suppose the equation CNF = a - CF/b represents the possible values of CNF and CF that Walther can achieve by buying some amount of insurance. What is the value a + b?

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  1. 22 February, 17:59
    0
    a + b = 1,900 - 4 = 1,896

    Explanation:

    i = amount insured in $

    CNF = $2,100 - $0.20i

    CF = $800 - $0.20i + i = $800 + $0.80i

    CNF = a - CF/b

    $2,100 - $0.20i = a - ($800 + $0.80i) / b

    $2,100 - $0.20i = a - $800/b - $0.80i/b

    now we equate:

    -0.2i = 0.8i/b

    b = 0.8/-0.2 = - 4

    2,100 = a - 800/b

    2,100 = a - 800/-4

    2,100 = a + 200

    a = 1,900

    a + b = 1,900 - 4 = 1,896
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