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: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which 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) Refer to the information in the scenario Choosing Insurance.The premium on a fair insurance policy for the Ramirez family will be:
A)$0.
B)$900.
C)$1,000.
D)$2,000.

Question

Quizplus · Accepted Answer

To determine the premium on a fair insurance policy, we need to calculate the expected value of repairs. The expected value of repairs is the probability of repairs multiplied by the cost of repairs, plus the probability of no repairs multiplied by zero.

Expected value of repairs = (0.10 x $10,000) + (0.90 x $0) = $1,000

Therefore, a fair insurance policy would require a premium of $1,000 to cover the expected cost of repairs. Option C is the correct answer.

Scenario: Choosing Insurance the Ramirez Family Owns Three Cars and Is