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

question 19

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 maximum insurance premium that Steve is willing to pay?

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

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Definitions:

Right Atrium

The right upper chamber of the heart that receives deoxygenated blood from the body via the venae cavae.

Fenestrated Capillaries

Capillaries with small pores in their endothelial lining allowing for increased permeability to fluids and small molecules, found in areas requiring extensive exchange such as in kidneys and endocrine glands.

Kidney

A pair of organs located in the abdominal cavity that filter blood, remove waste products, and regulate fluid balance.

Pancreas

A glandular organ in the digestive system that produces insulin, digestive enzymes, and other hormones.