Use the Following to Answer Questions

question 23

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 $1,000 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 $49,000, 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:

Liable in Tort

Legal responsibility arising from a civil case in which harm has been caused to an individual or property.

Intoxicated Person

An individual whose normal capacity to act or make decisions is significantly impaired due to the consumption of alcohol or drugs.

Mentally Ill

A broad term covering a range of mental health conditions that affect mood, thinking, and behavior.

Contractual Capacity

The legal ability of a party to enter into a contract, often considered in terms of age, mental competency, and similar factors.