Use the Following to Answer Questions

question 171

Multiple Choice

Use the following to answer questions:
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: in state 1 their cars need no repairs and their income available for purchasing other goods and services is $50,000; in state 2 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. For $2,000 the Ramirez family can buy insurance that will cover the full cost of repairs. 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:

Dementia

A broad category of brain diseases that cause a long-term and often gradual decrease in the ability to think and remember, affecting daily functioning.

Neural Tissues

Specialized tissues that constitute the central and peripheral nervous systems, responsible for transmitting signals throughout the body.

Cranial Nerves

A set of twelve nerves that originate in the brain and are primarily responsible for motor and sensory functions of the head and neck.

Auditory

Pertaining to the sense of hearing or the organs and structures involved in the process of hearing.