Use the Following to Answer Question

question 85

Multiple Choice

Use the following to answer question:
-(Scenario: Choosing Insurance) Use Scenario: Choosing Insurance.For $2,000,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and want to maximize their expected utility,they will: Scenario: Choosing Insurance
The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: in state 1,their cars need no repairs and their income available for purchasing other goods and services is $50,000;in state 2,their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000.The probability of repairs is 10%,while the probability of no repairs is 90%.

• A)buy the insurance.
• B)be indifferent between buying and not buying the insurance since their expected income for purchasing other goods and services is $48,000 regardless of what they do.
• C)buy the insurance as long as the utility of having a certain income of $48,000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance.
• D)self-insure.

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Definitions:

Region Of Optimality

The set of all solutions that optimizes a given objective function within a feasible region.

Iso-Profit Line

A graphical representation in managerial economics that shows combinations of different products or inputs that yield the same level of profit.

Feasible Region

The set of all feasible combinations of decision variables.

Optimum

The most favorable condition or degree of something that achieves the best possible outcome or efficiency.