-Steve Owns a Motorcycle Valued at $5,000 and That Is

question 131

Multiple Choice

-Steve owns a motorcycle valued at $5,000 and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless. Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. What is the minimum premium that the insurance company will accept?

• A) $1,000
• B) $2,000
• C) $500
• D) $1,500

---

Definitions:

Philosophical

Pertains to the study or exploration of fundamental questions regarding existence, knowledge, values, reason, mind, and language.

Ethology

The scientific study of animal behavior under natural conditions, often focusing on instinctual or evolutionary responses.

Mechanistic

Describing an explanation or process in terms of cause and effect, often with a focus on the physical or biochemical interactions.

Innate

Referring to attributes or abilities that are present from birth, not acquired through experience or learning.