Use the following to answer question:
-(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with current income equal to $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $10,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5.Suppose Amy can buy a fair insurance policy that will compensate her for any losses.Amy's premium will be _____,her guaranteed income will be _____,and her expected utility will be _____ utils.
A)$5,000;$10,000;200
B)$10,000;$30,000;500
C)$10,000;$40,000;620
D)$30,000;$50,000;720

Question

Use the following to answer question: 
-(Table: Amy's Utility Function)Use Table: Amy's Utility Function.Amy is an entrepreneur with current income equal to $40,000.Amy is considering development of a new product.The probability that her new product earns Amy $10,000 in additional income is 0.5,and the probability that Amy incurs a reduction of $10,000 from her current income is also 0.5.Suppose Amy can buy a fair insurance policy that will compensate her for any losses.Amy's premium will be _____,her guaranteed income will be _____,and her expected utility will be _____ utils.
A)$5,000;$10,000;200 
B)$10,000;$30,000;500 
C)$10,000;$40,000;620 
D)$30,000;$50,000;720

Quizplus · Accepted Answer

The premium that Amy will pay for the fair insurance policy will be equal to the expected value of the loss, which is 0.5(-$10,000) = -$5,000.

If Amy buys the insurance policy, her guaranteed income will be $40,000 - $5,000 = $35,000 if her new product does not sell, and $40,000 + $10,000 - $5,000 = $45,000 if her new product does sell.

Using the numbers in the table, we can calculate Amy's expected utility in each scenario:
- If Amy does not buy the insurance policy, her expected utility is: 0.5*150 + 0.5*80 = 115 utils
- If Amy buys the insurance policy, her expected utility is: 0.5*135 + 0.5*165 = 150 utils

Therefore, Amy should buy the insurance policy, and her expected utility will be 150 utils.

Use the Following to Answer Question