Stephanie's Utility Function Is Given by U = W^1/2 where

question 31

Multiple Choice

Stephanie's utility function is given by U = W^1/2 where W is the value of her house. She is considering whether to buy tornado insurance for her house. Her house is currently valued at
$105,625. She knows that her house will be destroyed by a tornado with probability .10 this spring. If it is hit, the rubble will be worth $15,625. What is the maximum amount that she is willing to pay for insurance if the insurance company pays $46875 and refunds her insurance premium in case of a tornado?

• A)2,345
• B)1,055
• C)8,835
• D)10,995

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Definitions:

Insurance Plans

Financial products designed to cover the cost of healthcare, among other risks, by pooling resources and risks.

Chiropractic

A healthcare discipline focused on the diagnosis, treatment, and prevention of mechanical disorders of the musculoskeletal system, especially the spine, under the hypothesis that these disorders affect general health via the nervous system.

Dietary Supplements

Products taken by mouth that contain dietary ingredients intended to supplement the diet, such as vitamins, minerals, herbs, or amino acids.

Supplement Diet

The practice of taking vitamins, minerals, or other nutritional products to add to one's daily food intake.