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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