Question

Sahar starts with $114 and then pays $46 for a new my Phone. For an additional $21 she can fully insure her phone against all damage. Sahar figures that there is a 25% chance she will completely ruin her phone by dropping it, after which she would definitely pay the $60 to replace it. Her utility is given by u(c)=ln c, where c includes the total value of her cash and of her phone. What is Sahar's expected utility if she buys the insurance? Please round your answer to the two digit to the right of decimal point.

Answer 1

4.53 dollars

Step-by-step explanation:

beginning amount = 114 dollars

. purchase amount = 46 dollars. the question says the phone can be fully insured against theft with 21 dollars.

114 - 21 = 93

from the question we have been told that Sahar's utility function is given by

u(c) = lnc

we take the natural logarithm of 93

u(c) = ln93

u(C) = 4.53 dollars

so Sahars expected utility if she buys the insurance is 4.53 dollars