The Conduire Family Owns Three Cars and Is Considering Buying

question 142

Multiple Choice

The Conduire 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 occurrence is 0.5 for each state. They can buy insurance that will cover the full cost of repairs for $5,000. If the Conduires are risk-averse and 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 $45,000 regardless of what they do.
• C) they will not buy the insurance, since buying it does not increase their expected income for purchasing other goods and services.
• D) they will put $10,000 in savings to pay for any required repairs and not buy insurance.

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Definitions:

Responsiveness

The quality of reacting quickly and positively to stimuli or changes.

Unconditioned Response

An automatic reaction to a stimulus that occurs naturally, without the need for learning.

Pupil

The opening in the center of the iris of the eye, through which light enters the eye.

Bright Light

Intense illumination that can affect various biological and psychological processes.