John owns and runs a food truck, which he expects to increase his wealth to $40,000 this year. John knows that every year, thereis a 20% chance that his truck will be firebombed by one of his ruthless food truck competitors. If this happens, he will face a billof $10,000 in repairs and lost income. John can choose to get insurance to cover all repair costs and lost wealth. Use thisinformation and the information in the table and graph to answer the questions.Total utilityWealthTotal utility (utils)7301000$32,000900$34,000755800700$36,000785600792500$38,0004003002001000$5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000WealthWhat is John's expected wealth?expected wealth: $What is the price for John's insurance?price of insurance: $What is John's expected utility without insurance?expected utility: 730If John chooses to pay the insurance policy price, what wouldbe his total utility?total utility:10304200010000utilsutils

The given probability that damage will occur, P = 20% = 0.20 Probability of no damage = 1 - P =>…

John owns and runs a food truck, which is a 20% chance that his truck will be firebombed by one of his of $10,000 in repairs and lost income. John can choose to get in information and the information in the table and graph to answe

John owns and runs a food truck, which is a 20% chance that his truck will be firebombed by one of his of $10,000 in repairs and lost income. John can choose to get in information and the information in the table and graph to answe

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section19.2: Managing Risk

Problem 2QQ

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Question

John owns and runs a food truck, which he expects to increase his wealth to $40,000 this year. John knows that every year, there
is a 20% chance that his truck will be firebombed by one of his ruthless food truck competitors. If this happens, he will face a bill
of $10,000 in repairs and lost income. John can choose to get insurance to cover all repair costs and lost wealth. Use this
information and the information in the table and graph to answer the questions.
Total utility
Wealth
Total utility (utils)
730
1000
$32,000
900
$34,000
755
800
700
$36,000
785
600
792
500
$38,000
400
300
200
100
0
$5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000
Wealth
What is John's expected wealth?
expected wealth: $
What is the price for John's insurance?
price of insurance: $
What is John's expected utility without insurance?
expected utility: 730
If John chooses to pay the insurance policy price, what would
be his total utility?
total utility:
1030
42000
10000
utils
utils

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