Solved: Wilbur is an airline pilot who currently has income

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Wilbur is an airline pilot who currently has income of

Wilbur is an airline pilot who currently has income of $60,000. If he gets sick and loses his flight
medical certificate, he loses his job and has only $10,000 income. His probability of staying
healthy is 0.6, and his probability of getting sick is 0.4. Wilbur's utility function is given in the
accompanying table.

Income Total utility (utils)

$0……………………………. 0

10,000……………………….. 60

20,000……………………….. 110

30,000……………………….. 150

40,000……………………….. 180

50,000……………………….. 200

60,000……………………….. 210

a. What is the expected value of Wilbur's income?

b. What is Wilbur's expected utility? Wilbur thinks about buying "loss-of-license" insurance that
will compensate him if he loses his flight medical certificate.

c. One insurance company offers Wilbur full compensation for his income loss (that is, the
insurance company pays Wilbur $50,000 if he loses his flight medical certificate), and it charges
a premium of $40,000. That is, regardless of whether he loses his flight medical certificate,
Wilbur's income after insurance will be $20,000. What is Wilbur's utility? Will he buy the
insurance?

d. What is the highest premium Wilbur would just be willing to pay for full insurance (insurance
that completely compensates him for the income loss)?

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 Wilbur is an airline pilot who currently has income of

ANSWER
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