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 _____.
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- how did you get there? if you don't mind
- 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
- Feb 26, 2018 at 9:35pm
- 45 if from the utility table at the income of 60,000
- Feb 26, 2018 at 9:38pm