Use the following to answer questions:
-(Table: Amy's Utility Function) Look at the 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 questions: 
-(Table: Amy's Utility Function) Look at the 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 is $10,000 (the expected loss), her guaranteed income is $40,000 (current income minus premium plus compensation), and her expected utility is 620 utils (calculated based on her utility function).

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