-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000, and there is a 25 percent chance that he could lose it all. If an insurance company offers to insure against this loss for $6,000, John will
A) buy the policy.
B) not buy the policy.
C) be indifferent between being insured and uninsured.
D) There is not enough information to answer.

Question

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000, and there is a 25 percent chance that he could lose it all. If an insurance company offers to insure against this loss for $6,000, John will
A) buy the policy. 
B) not buy the policy. 
C) be indifferent between being insured and uninsured. 
D) There is not enough information to answer.

Quizplus · Accepted Answer

John will buy the policy because the expected utility of being insured (with certainty of $14,000) is higher than the expected utility of facing a 25% chance of losing all his wealth.

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