Mary is a fervent Iowa State University Cyclone Basketball fan. She derives utility as a function of the ISU team winning the Big XII championship and from income according to the function
U(I_c, w) = 35 I_c + w, where
= {
and w is her level of wealth. Mary believes the probability of a Cyclone championship is ¹/₄. Mary has been offered the following "insurance policy." The insurance policy costs $16. If the Cyclones win the championship, she pays only the policy cost of $16. If the Cyclones lose, she will receive $21.50 (so that after taking into account the policy cost of $16, her net return is $5.50). Will Mary's expected utility increase if she purchases the policy?

Question

Mary is a fervent Iowa State University Cyclone Basketball fan. She derives utility as a function of the ISU team winning the Big XII championship and from income according to the function
U(I_c, w) = 35 I_c + w, where

= {

and w is her level of wealth. Mary believes the probability of a Cyclone championship is ¹/₄. Mary has been offered the following "insurance policy." The insurance policy costs $16. If the Cyclones win the championship, she pays only the policy cost of $16. If the Cyclones lose, she will receive $21.50 (so that after taking into account the policy cost of $16, her net return is $5.50). Will Mary's expected utility increase if she purchases the policy?

Quizplus · Accepted Answer

The Answer of Mary is a fervent Iowa State University Cyclone Basketball fan. She derives utility as a function of the ISU team winning the Big XII championship and from income according to the function U(I_c, w) = 35 I_c + w, where = { and w is her level of wealth. Mary believes the probability of a Cyclone championship is ¹/₄. Mary has been offered the following "insurance policy." The insurance policy costs $16. If the Cyclones win the championship, she pays only the policy cost of $16. If the Cyclones lose, she will receive $21.50 (so that after taking into account the policy cost of $16, her net return is $5.50). Will Mary's expected utility increase if she purchases the policy?

Mary Is a Fervent Iowa State University Cyclone Basketball Fan