Your current disposable income is $10,000. There is a 10% chance you will get in a serious car accident, incurring damage of $1,900. (There is a 90% chance that nothing will happen.) Your utility function is $U = \sqrt { I }$ , where I is income. What is the fair price of this policy?
A) $100
B) $190
C) $199
D) $270

Question

Quizplus · Accepted Answer

The fair price of the insurance policy is the expected loss, which is 10% of $1,900, equaling $190.

Your Current Disposable Income Is $10,000 U=IU = \sqrt { I }U=I​

Your Current Disposable Income Is $10,000 $U = \sqrt { I }$