-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss?
A) $0
B) $2,000
C) $3,000
D) $17,000

Question

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000. If there is a 10 percent chance of losing all his wealth, what is the value of insurance against this loss?
A) $0 
B) $2,000 
C) $3,000 
D) $17,000

Quizplus · Accepted Answer

The value of insurance is the expected loss, which is 10% of $20,000, equaling $2,000. However, since utility is not linear, the risk-averse individual would be willing to pay more than the expected loss to avoid the risk, leading to a higher value of insurance.

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