-Steve Owns a Motorcycle Valued at $5,000 and That Is

question 46

Multiple Choice

-Steve owns a motorcycle valued at $5,000 and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. Both Steve and the insurance company will gain if the insurance premium is

• A) $900.
• B) $1,200.
• C) $1,600.
• D) $700.

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Definitions:

AGI

Adjusted Gross Income, which is gross income minus specific deductions, used to calculate an individual's tax liability.

EIC

The Earned Income Credit, a refundable tax credit for low- to moderate-income working individuals and families, particularly those with children.

Tax Liability

The total amount of tax that an individual or business is legally obligated to pay to a taxing authority.

Premium Tax Credit

A refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Marketplace.