Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
$$\begin{array} { | r | c | }
\hline \text { Income } & \text { Total Utility } \
\hline \$ 0 & 0 \
\hline \$ 20,000 & 25 \
\hline \$ 40,000 & 45 \
\hline \$ 60,000 & 60 \
\hline \$ 80,000 & 70 \
\hline
\end{array}$$
-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Jane?
A) $0
B) $20,000 or less
C) more than $20,000 but less than $40,000
D) $40,000 or more

Question

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
 $$\begin{array} { | r | c | } 
\hline \text { Income } & \text { Total Utility } \
\hline \$ 0 & 0 \
\hline \$ 20,000 & 25 \
\hline \$ 40,000 & 45 \
\hline \$ 60,000 & 60 \
\hline \$ 80,000 & 70 \
\hline
\end{array}$$
-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Jane?
A) $0
B) $20,000 or less
C) more than $20,000 but less than $40,000
D) $40,000 or more

Quizplus · Accepted Answer

The expected utility without insurance is (1/3 * 0) + (2/3 * 60) = 40. With insurance, her utility would be 60 regardless of disability. The utility difference is 60 - 40 = 20, which corresponds to an income difference between $40,000 and $60,000, so the insurance is worth more than $20,000 but less than $40,000.

Refer to the Data Provided in Table 17 -Refer to Table 17