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 for $20,000 which will pay her her full salary in the event she becomes disabled. Jane's utility per year with the policy is and her expected utility without the policy is .

A) 45; 40
B) 45; 45
C) 60; 40
D) 20; 45

Question

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 for $20,000 which will pay her her full salary in the event she becomes disabled. Jane's utility per year with the policy is ________ and her expected utility without the policy is ________.

A) 45; 40
B) 45; 45
C) 60; 40
D) 20; 45

Manuel Espinoza · Accepted Answer

Final Answer : A, Explanation :  Jane's expected utility with the policy is 45 because she has a 1/3 chance of becoming disabled and earning $0, and a 2/3 chance of not becoming disabled and earning $60,000. Her expected utility without the policy is 40 because she has a 1/3 chance of becoming disabled and earning $0, and a 2/3 chance of not becoming disabled and earning $60,000.

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