Your Current Disposable Income Is $10,000 $U = \sqrt { I }$

question 40

Multiple Choice

Your current disposable income is $10,000. There is a 10% chance you will get in a serious car accident, incurring damage of $1,900. (There is a 90% chance that nothing will happen.) Your utility function is $U = \sqrt { I }$ ,where I is income. If this policy is priced at $40, what is the change in your expected utility if you purchase the policy rather than no insurance?

• A)1
• B)0.8
• C)0.2
• D)0

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Definitions:

Negative Externalities

A situation where a third party suffers from a decision or action made by others, typically not reflected in the market price.

Positive Externalities

Benefits enjoyed by third-party individuals or the society at large, which result from an economic activity but are not reflected in the market prices.

Negative Externality

An external effect of a product or activity that imposes a negative impact on a third party or the environment.

Internalize

The process of taking into account the external effects of economic actions, such as externalities, within the decision-making process.