Use the following to answer questions:
-(Table: Income and Utility for Tyler) The table Income and Utility for Tyler shows the utility Tyler receives at various income levels, but she does not know what her income will be next year. There is a 40% chance her income will be $20,000, a 40% chance her income will be $30,000, and a 20% chance her income will be $40,000. What is the maximum amount of insurance Tyler would be willing to pay to guarantee an income of $28,000?
A) $0
B) $1,484
C) $26,516
D) $126

Question

Use the following to answer questions: 
-(Table: Income and Utility for Tyler) The table Income and Utility for Tyler shows the utility Tyler receives at various income levels, but she does not know what her income will be next year. There is a 40% chance her income will be $20,000, a 40% chance her income will be $30,000, and a 20% chance her income will be $40,000. What is the maximum amount of insurance Tyler would be willing to pay to guarantee an income of $28,000?
A) $0 
B) $1,484 
C) $26,516 
D) $126

Quizplus · Accepted Answer

To find the maximum insurance Tyler would pay, calculate the expected income and utility, then find the utility of $28,000. The expected income is $28,000, and the expected utility is the weighted average of utilities at each income level. The difference in utility between $28,000 and the expected utility gives the maximum insurance payment.

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