Ms Rich Has Just Bought a New $30,000 Car

question 27

Essay

Ms. Rich has just bought a new $30,000 car. As a reasonably safe driver, she believes that there is only a 5% chance of being in an accident in the forthcoming year. If she is involved in an accident, the damage to her new car depends on the severity of the accident. The probability distribution for the range of possible accidents and the corresponding damage amounts (in dollars) are shown in the table below. Ms. Rich is trying to decide whether she is willing to pay $170 each year for collision insurance with a $300 deductible. Note that with this type of insurance, she pays the first $300 in damages if she causes an accident, and the insurance company pays the remainder.
Distribution of Accident Types and Corresponding Damage Amounts
-Determine the payoffs associated with each possible decision and type of accident (cost in dollars).

---

Definitions:

Congenital Cataract

A vision impairment present at birth where the lens of the eye is cloudy or opaque, affecting clarity of vision.

Depth Perception

The ability to perceive the distance of objects from each other and from ourselves.

Visual Acuity

Sharpness of vision.

Visual Tracking

The ability to smoothly follow moving objects with one's eyes.