Bikul has just started a great job and plans to buy a fancy car worth $100,000.Bikul is risk-averse, but he likes to drive fast, so the probability that he wrecks and totals the car (a total loss of $100,000) is 0.10.The probability that he has no accidents is 0.90.If an insurance company were to offer Bikul a fair insurance policy, the premium would be equal to:
A)$10,000.
B)$90,000.
C)$80,000.
D)It is impossible to calculate a premium unless we know Bikul's utility function.

Question

Quizplus · Accepted Answer

The expected value of the loss is 0.10 * $100,000 = $10,000. Therefore, the fair insurance premium would be $10,000.

Bikul Has Just Started a Great Job and Plans to Buy