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 $650,000.Insurance with a $50,000 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

To determine the most that the business should pay for insurance, we need to calculate the expected cost of lawsuits.
Expected cost = Probability of injury/death x Cost of settlement
Probability of injury/death = 1/1000 = 0.001
Cost of settlement = $650,000

Expected cost = 0.001 x $650,000 = $650

Since the insurance has a deductible of $50,000, the expected cost of insurance is $600 ($50,000 premium + $650 expected cost of lawsuits).

Therefore, the most that the business should pay for insurance is $600.

Whitewater Rapids Provides Canoes to Tourists Eager to Ride Whitewater