-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000 and there is a 10 percent chance of losing it all. John is
A) willing to pay any price for insurance.
B) willing to pay no more than $2,000 for insurance.
C) willing to pay no more than $3,000 for insurance.
D) willing to pay $5,000 for insurance.

Question

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000 and there is a 10 percent chance of losing it all. John is
A) willing to pay any price for insurance. 
B) willing to pay no more than $2,000 for insurance. 
C) willing to pay no more than $3,000 for insurance. 
D) willing to pay $5,000 for insurance.

Quizplus · Accepted Answer

John's expected loss is $2,000 (10% of $20,000). He would be willing to pay a risk premium above this expected loss to avoid the risk, but not more than $3,000, as this would exceed the utility he gains from having insurance.

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