Question 1
Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Refer to Table 17.6. From the table, we can see that Isabel is
◦ risk-averse.
◦ risk-loving.
◦ risk-neutral.
◦ We cannot determine Isabel's attitude toward risk from the table.
Question 2
Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Isabel's utility with the policy is
◦ 112.5 and her expected utility without the policy is 90.
◦ 90 and her expected utility without the policy is 112.5.
◦ 90 and her expected utility without the policy is 37.5.
◦ 37.5 and her expected utility without the policy is 75.
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