Simon Owns Several Gas Stations

question 119

Multiple Choice

Simon owns several gas stations. He realizes that among the several risks associated with this type of business is the risk of minor damage to cars from dirty or contaminated fuel. He also knows that there is a small chance of a major loss if a fire occurred at one of his gas stations. Simon wants to control his insurance costs while still maintaining a reasonable risk management program. He is considering self-insurance. If he decides to use this approach, he will probably

• A) rely entirely on a strategy of risk avoidance.
• B) decide to cover both types of risk himself.
• C) decide to self-insure for the smaller, more routine, losses associated with the damage caused by dirty or contaminated fuel, but seek coverage from an insurance company for the potentially much larger loss from a fire.
• D) decide to cover the risk of fire himself, and take out an insurance policy to cover the risk of contaminated fuel.

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Definitions:

Average Total Cost

The total cost of production divided by the number of units produced, including both fixed and variable costs.

Robot Hours

The amount of time robots are operational and performing tasks in place of human labor.

Cost-output Elasticity

Cost-output elasticity measures the responsiveness of the cost of production to changes in the quantity of output produced, indicating the scale economies in production.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.