Question: Samantha's utility function is U(Y) = Y0.5. She tries to maximize her expected utility. She owns a car for business that she will have to
Samantha's utility function is U(Y) = Y0.5. She tries to maximize her expected utility. She owns a car for business that she will have to replace if it is stolen. If her car is not stolen, her net income will be $122,500. If the car is stolen, her net income will be reduced by the car's replacement cost of $20,100. The probability that the car will be stolen is 20%.
Samantha learns that she can purchase an antitheft device that will lower the probability the car will be stolen to 10%. Would Samantha purchase the device at prices of $1,900, $2,000, or $2,100?
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