Whitewater Rapids provides canoes to tourists eager to ride Whitewater river's rapids.Management has determined that there is one chance in a thousand of a customer being injured or killed.Settlement of resulting lawsuits has an average cost of $850,000.Insurance with a $100,000 deductible is available.It covers the costs of lawsuits,unless there is evidence of criminal negligence.Based on cost-benefit analysis,what is the most that the business should pay for the insurance?

Question

Quizplus · Accepted Answer

The expected cost of a lawsuit is $850 (0.001 chance * $850,000). Since the insurance covers costs above the $100,000 deductible, the business should pay up to $750 for the insurance ($850 expected cost - $100,000 deductible).

Whitewater Rapids Provides Canoes to Tourists Eager to Ride Whitewater