Use the Following to Answer Questions

question 96

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 $900 the Ramirez family can buy insurance that will cover the full cost of repairs. If family members 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 $49,100, 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 self-insure.

---

Definitions:

Predictive Validity

The extent to which a score on a scale or test predicts future performance on a related task.

Vocational Success

Achieving desired career outcomes and fulfillment in one's chosen vocational path or profession.

Intelligence Scores

Numerical assessments derived from standardized tests that attempt to measure an individual's cognitive abilities and potential.

Heredity

The transmission of traits or characteristics from parents to offspring through genes across generations.