-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. The maximum amount that Ashton is willing to pay for auto insurance is
A) $6,000 per year.
B) $3,000 per year.
C) $9,000 per year.
D) $10,000 per year.

Question

-Ashton has the utility of wealth curve shown in the above figure. He owns a sports car worth $30,000, and that is his only wealth. Ashton is a careless driver and there is a 30 percent chance that he will have an accident within a year. If he does have an accident, his car is worthless. The maximum amount that Ashton is willing to pay for auto insurance is
A) $6,000 per year. 
B) $3,000 per year. 
C) $9,000 per year. 
D) $10,000 per year.

Quizplus · Accepted Answer

Ashton's expected loss from an accident is 30% of $30,000, which is $9,000. Therefore, the maximum amount he is willing to pay for insurance is $9,000, as it would cover his expected loss.

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