High-Crime Auto Theft, an insurance company, offers to sell Larry insurance at $8,000 a year and promises to provide Larry with a replacement car worth $20,000 if his car is stolen. Is Larry willing to buy this insurance? If not, is he willing to pay $4,000 a year for such insurance?

Larry lives in a neighborhood in which 20 percent of the cars are stolen every year. Larry’s car, which he parks on the street overnight, is worth $20,000. (This is Larry’s only wealth.) The table shows Larry’s utility of wealth schedule.

Wealth                     Utility

(dollars)                   (units)

20,000                         400

16,000                         350

12,000                         280

  8,000                          200

  4,000                          110

         0                               0