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:

Lerner Index

A measure of a firm's pricing power and market control, calculated as the difference between price and marginal cost, divided by price.

Elastic Demand

A situation where the quantity demanded of a good or service significantly changes in response to a change in its price.

Lerner Index

An economic measure of a firm's market power, calculated as the difference between price and marginal cost relative to price, indicating the degree of monopoly power.

Monopoly Power

The degree of power held by a monopoly, characterized by the ability to control market prices and exclude competitors within a particular market or industry.