Which of the following is true about an individual's choice of insurance assuming state-independent tastes?
A)Full insurance will be chosen from a full menu of actuarily fair insurance if tastes are risk averse.
B)No insurance will be chosen if the menu of insurance contracts is actuarily unfair and tastes are risk averse.
C)No insurance will be chosen if the menu of insurance contracts is actuarily unfair and tastes are risk-neutral.
D)(a) and (b) are true.
E)(a) and (c) are true.
F)(b) and (c) are true.
G)All of the above.
H)None of the above

Question

Quizplus · Accepted Answer

With state-independent tastes, risk-averse individuals will choose full insurance when it is actuarily fair, as in choice A. Risk-neutral individuals will not choose insurance if it is actuarily unfair, as in choice C, because they are indifferent to risk and would not pay more than the expected loss.

Which of the Following Is True About an Individual's Choice