Use the following to answer question:
-(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $2,000,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: 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%.
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 $48,000 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.

Question

Use the following to answer question: 
-(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $2,000,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: 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%.
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 $48,000 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.

Quizplus · Accepted Answer

Given the scenario, the Ramirez family is risk-averse, which means they prefer the certainty of having a known outcome over a gamble with an uncertain outcome, even if the expected values are the same. Buying insurance guarantees them a certain outcome of $48,000 available for other goods and services, as opposed to facing a 10% chance of having only $40,000 and a 90% chance of having $50,000 without insurance. The choice to buy insurance depends on their preference for avoiding risk and having a certain income level for other expenditures.

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