When Jeff bought a house he also bought homeowners insurance, but when he bought a new dishwasher he refused to buy the repair insurance policy the store offered. Assuming Jeff is rational in his choices, which of the following is the most likely cause of his behavior?
A)He switches back and forth between risk averse and risk loving preferences.
B)He doesn't trust appliance insurers because they have no agent to relate to.
C)The probability of his house burning is greater than the probability a dishwasher failure.
D)The expected loss from dishwasher failure is less than the insurance premium and he can afford to absorb smaller losses.

Question

Quizplus · Accepted Answer

Jeff is likely behaving rationally and considering the expected cost of a dishwasher repair compared to the cost of the insurance premium. Since the expected loss from a dishwasher failure is less than the insurance premium, he can afford to absorb the smaller losses and therefore chooses not to purchase the repair insurance policy. On the other hand, he did purchase homeowners insurance because the probability of his house burning is greater than the probability of a dishwasher failure, making the potential loss greater and justifying the cost of the insurance premium.

When Jeff Bought a House He Also Bought Homeowners Insurance