Mary and Bob Are Trying to Decide How Much Auto

question 10

Multiple Choice

Mary and Bob are trying to decide how much auto insurance to buy. They share the same expectations of an accident, with the same dollar loss. They also have the same income levels. However, Mary would rather buy very little insurance, while Bob would rather buy much more insurance. This suggests that:

• A) Bob is more risk-averse than Mary.
• B) Mary is more risk-averse than Bob.
• C) Bob is risk-averse and Mary is risk-loving.
• D) Mary is risk-averse and Bob is risk-loving.

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Definitions:

Agency Theory

A theory explaining the relationship between principals, such as shareholders, and agents, such as company executives, and how to best align the interests of both parties.

Owners

The individuals or entities that legally possess an asset or property.

Agents

Individuals or entities authorized to act on behalf of others in financial transactions or negotiations.