Consider a fairly-priced insurance policy that fully indemnifies the purchaser against their loss. This insurance policy would most likely be purchased by:
A)a risk-loving decision maker.
B)a risk-neutral decision maker.
C)a risk-averse decision maker.
D)all decision makers.

Question

Quizplus · Accepted Answer

A fully indemnifying insurance policy would be most likely purchased by a risk-averse decision maker, who is more concerned about avoiding losses than potentially gaining from risky outcomes. This type of policy provides complete protection against loss, which is attractive to individuals who prefer a guaranteed outcome rather than taking on risk. Risk-loving decision-makers would be more likely to take on risk, while risk-neutral decision makers would be indifferent towards the fully indemnifying policy as they are not primarily concerned with risk. Therefore, the best choice is C - a risk-averse decision maker. A fully indemnifying insurance policy implies that the purchaser will not bear any risk of loss. As a result, risk-averse decision makers, who seek to avoid risk as much as possible, are likely to be the most interested buyers. Risk-neutral decision makers are indifferent to risk and therefore may not see the need to purchase such a policy, while risk-loving decision makers are unlikely to be interested in forgoing potential gains in exchange for complete protection against loss.

Consider a Fairly-Priced Insurance Policy That Fully Indemnifies the Purchaser