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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) Look at 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

A fair insurance premium is calculated by multiplying the probability of the event by the cost of the event. Here, the probability of needing repairs is 10%, and the cost of repairs is $10,000. Therefore, the fair premium is 0.10 * $10,000 = $1,000.

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