-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Andrew would have the same expected utility as he currently has if his wealth was ________ and he faced no uncertainty.
A) $30,000
B) $27,000
C) $21,000
D) $18,000

Question

-Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Andrew would have the same expected utility as he currently has if his wealth was ________ and he faced no uncertainty.
A) $30,000 
B) $27,000 
C) $21,000 
D) $18,000

Quizplus · Accepted Answer

Andrew's expected utility with the risk of an accident is calculated by considering the utility of having $30,000 with a 90% probability and $0 with a 10% probability. The certainty equivalent wealth is the amount of wealth that gives him the same utility without any risk, which is $21,000.

-Andrew Has the Utility of Wealth Curve Shown in the Above