River Rafting Adventures of Iowa provides rafts and tour guides to tourists eager to ride the wild rivers of Iowa.Management has determined that there is one chance in a thousand of a client being injured or killed.Settlement of resulting lawsuits have 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 per client for the insurance?
A)$500
B)$650
C)$600
D)$50

Question

Quizplus · Accepted Answer

The expected cost per client without insurance is $650 (0.001 chance of $650,000). With insurance, the business pays a $50,000 deductible, so the expected cost is $50 (0.001 chance of $50,000). The maximum insurance premium should be the difference: $650 - $50 = $600.

River Rafting Adventures of Iowa Provides Rafts and Tour Guides