Scenario: Choosing Insurance the Ramirez Family Owns Three Cars and Is

question 115

Multiple Choice

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: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which 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%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The Ramirez family can buy insurance that will cover the full cost of repairs for $2,000.If family
Members are risk-averse and want to maximize their expected utility:

• A)they will buy the insurance.
• B)they will 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)they will 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)they will self-insure.

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Definitions:

Facility-Level Costs

Costs related to activities and services that support the entire organization, like factory rent or salaries of maintenance staff.

Facility-Level Costs

Fixed costs that do not vary with the level of production or output, associated with maintaining a production facility.

Activity-Based Costing

An accounting method that allocates costs to products or services based on the activities and resources consumed in the production or delivery process.

Overhead Assignment

The process of allocating indirect costs (or overheads) to various cost objects such as products, projects, or departments.