-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, what is the value of insurance against the theft?
A) $0
B) $5,000
C) $7,000
D) $13,000

Question

-John's utility of wealth curve is shown in the above figure. He currently has total wealth of $20,000. If there is a 50 percent chance that his $10,000 car will be stolen, what is the value of insurance against the theft?
A) $0 
B) $5,000 
C) $7,000 
D) $13,000

Quizplus · Accepted Answer

The value of insurance is the difference between the expected utility without insurance and the utility with certain wealth. With a 50% chance of losing $10,000, the expected wealth is $15,000. The insurance value is the amount that makes John's utility at $20,000 equal to the expected utility at $15,000, which is $7,000.

-John's Utility of Wealth Curve Is Shown in the Above