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Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become...

Suppose Terri has a​ 25% chance of becoming disabled in any given year. If she does become​ disabled, she will earn​ $0. If Terri does not become​ disabled, she will earn her usual salary of​ $80,000. Terri has the opportunity to purchase disability insurance for​ $20,000 which will pay her her full salary in the event she becomes disabled.​ Terri's utility with the policy is​ _____ and her expected utility without the policy is​ _____.


​45; 56.25


​18.75; 37.5


​45; 18.75


​56.25; 45

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  • how did you get there? if you don't mind
    • adamlyte
    • Feb 26, 2018 at 9:32pm
  • ncome after policy = 80000-20000 = $ 60000 utility with the policy = 45 income without policy = 80000 expected utility = 0.25*0 + 0.75*75 = 56.25
    • academicgiant
    • Feb 26, 2018 at 9:35pm
  • 45 if from the utility table at the income of 60,000
    • academicgiant
    • Feb 26, 2018 at 9:38pm

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