Use the Following to Answer Questions

question 46

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) Use 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,they will:

• A) buy the insurance.
• B) 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) 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) self-insure.

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Definitions:

Acid-Test Ratio

A financial metric that measures a company's ability to pay off its short-term liabilities with its quick assets.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.

Operating Expenses

Costs associated with the day-to-day functions of a business, excluding production costs.

Gross Margin

Gross margin is a financial metric that measures the difference between revenue and the cost of goods sold (COGS), divided by revenue.