In Eugene, Oregon, Next Year There Is a 2% Chance

question 10

Multiple Choice

In Eugene, Oregon, next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property. Quincy, who has $3,000,000 in buildings and personal property, has the opportunity to purchase complete earthquake insurance. Which is true?

• A) Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's all he could possibly lose in an earthquake.
• B) Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's his expected loss in an earthquake.
• C) If Quincy buys earthquake insurance, and an earthquake does not occur, he will have received no utility from the transaction.
• D) What Quincy is willing to pay for the earthquake insurance depends upon his degree of risk aversion.
• E) Quincy should be willing and able to pay up to $3,000,000 for earthquake insurance.

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Definitions:

Personal Service

Personal service is a type of service delivered by an individual to meet personal needs or requirements of customers, often characterized by direct interaction.

Contractual Obligations

Legal duties that arise out of agreements between two or more parties where each has responsibilities to perform as specified in the contract.

Assignment

The transfer of rights, property, or obligations from one party to another.

Delegation

The act of assigning responsibility or authority from one person to another to carry out specific activities.