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

question 25

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
-Generate a statistical summary and risk profile for each of Mrs. Rich's possible decisions. Does this information impact her decision?

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Definitions:

Valid Contract

An agreement that meets all legal requirements and is enforceable by law.

Contractual Capacity

The legal ability of a person to enter into a contract.

Legal Ability

Legal ability refers to the combination of knowledge, skills, and competence that enables a practitioner to effectively perform legal tasks and duties in compliance with the standards of the profession.

Contractual Relationship

A legally binding agreement between two or more parties that outlines the terms and conditions of their engagement.