Ashwini is thinking of buying travel insurance (which pays her if she needs to cancel her trip) for her trip to Cancun over spring break. There is a 5 percent chance that she will need to cancel her trip. Without insurance she would lose the full $2,000 price of the trip; with insurance she would get a full refund of $2,000. The premium for this insurance is $105. Which of the following is CORRECT? I. The expected value of Ashwini's loss is $100.
II) If Ashwini is risk averse she is willing to buy the insurance only if its price is less than $100.
A) I only
B) II only
C) I and II
D) neither I nor II

Question

Quizplus · Accepted Answer

The expected value of Ashwini's loss is calculated as 5% of $2,000, which is $100.

Ashwini Is Thinking of Buying Travel Insurance (Which Pays Her