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 most you would be willing to pay for this policy (rather than no insurance)?
A) $100
B) $190
C) $199
D) $270

Question

Quizplus · Accepted Answer

The expected utility without insurance is 0.9 * sqrt(10000) + 0.1 * sqrt(8100) = 99.1. To find the maximum premium, set the utility with insurance equal to this: sqrt(10000 - P) = 99.1. Solving gives P = $199.

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

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