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Sorry for asking this but this math problem has got me confused. How do i go about calculating the threshold value of this problem?

Consider that I have an asset worth $2000. There are two independent threats.

The first occurs with probability 0.05 and would reduce the value of the asset to $100, while the second occurs with probability 0.01 and would completely destroy the asset. Both could occur. What would be the threshold value at which buying insurance would be "worthwhile for both parties"?

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    No need to apologize for asking math problems, that's what this site is for :-) However, in its current form, this is not a math problem. There are missing assumptions e.g. about risk-aversity that I doubt can be inferred without further information, but certainly inferring them would require not mathematical but economic knowledge.2012-11-14
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    Yes, just calculate the expected value. Are the two events mutually exclusive (I would assume yes....)2012-11-14
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    @SimonHayward, This is a hwk question. I found another one with similar format at http://i.stack.imgur.com/Ks6FU.png2015-11-21

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I'm assuming that the two events are mutually exclusive. Let $X$ denote the value of the asset, i.e. $$ X=2000-100\cdot 1({\text{event 1 occurs}})-2000\cdot 1(\text{event 2 occurs}) $$ then $$ E[X]=2000-100\cdot P(\text{event 1 occurs})-2000\cdot P(\text{event 2 occurs}). $$

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    thanks for your help. so using that formula that you have given me, i have calculated the threshold value to be 1895.01.2012-11-14
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    but is the threshold value supposed to be this high in the context of this problem?2012-11-14
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    I don't know what the threshold is supposed to be. I edited my answer, since the two events are probably mutually exclusive.2012-11-14
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    so is it safe to say that 1895.01 would be the threshold value for buying the insurance at a worthwhile value for both parties?2012-11-14
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    I'm getting 1975, which is the expected value of the asset. So as a buyer, you would not want to pay more than 1975 for an insurance, but on the other hand, as a provider, you would not want to sell an insurance for less than 1975. So this would be the threshold value.2012-11-14
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    i see thanks alot!. i have a question for the expected value formula at the part where 2000.P(event 1 occurs). why is it event 1 in the bracket instead of event 2?2012-11-14
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    Should of course have been "event 2".2012-11-14
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    @StefanHansen, Hmm, if 1975 is the expected value, then buying it would **not* be worthwhile for any party (since energy is spent to earn $0). So if not 1975, what is the answer?2015-11-21