You represent an insurance company selling home insurance to a town on Mars that is plagued by meteor showers. You know the value range of the 100 homes in the town and the average home value. Furthermore, past records show the percentage of homes
damaged every year.
Due to the lack of screening options on Mars, you need to charge each homeowner the same price. That means you can only set one price for the insurance every year.
Use the slider to set a price and press Set Price
Every homeowner individually decides whether to buy the insurance or not, based on the price you set and depending on their value and the risk of being struck by a meteor. At the end of the year you need to cover the full value of every homeowner
that bought the insurance and was struck by a meteor. All homes are equally likely to be damaged.
As a profit maximizing company, your goal is to set the price such that the revenue from homeowners who bought the insurance exceeds the costs of covering damaged homes at the end of the year.
Let’s say, you set the price to be $10,000 this year.
Ten homeowners decide to buy the insurance; thus, your revenue is \(10 * $10,000 = $100,000\)
Now assume that two houses get struck by meteors: one house was worth $50,000 and the other house $30,000. Hence, your expenditures are \($50,000 + $30,000 = $80,000\)
Consequently, your profit at the end of the year is: \($100,000 - $80,000 = $20,000\)