Use the following to answer question:
-(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $900,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and 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 $49,100,regardless of what they do.
C)not buy the insurance,since buying it does not increase their expected income for purchasing other goods and services.
D)self-insure.

Question

Use the following to answer question: 
-(Scenario: Choosing Insurance)Use Scenario: Choosing Insurance.For $900,the Ramirez family can buy insurance that will cover the full cost of repairs.If family members are risk-averse and 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 $49,100,regardless of what they do. 
C)not buy the insurance,since buying it does not increase their expected income for purchasing other goods and services. 
D)self-insure.

Quizplus · Accepted Answer

The cost of repairs in state 2 is $10,000 which is a significant amount compared to their overall income. Additionally, the probability of repairs is relatively high at 10%. Therefore, it would be prudent for the Ramirez family to buy insurance to cover the full cost of repairs in case the repairs are necessary in state 2. This will maximize their expected utility by minimizing the potential loss of income due to repair costs.

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