Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered a full coverage insurance policy for her house at $2000,would she buy the insurance?
A)Yes because she gets to now enjoy her wealth risk-free
B)No,because she can take the risk and be better off
C)Yes,because she gains on average with the insurance
D)Both A&C

Question

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered a full coverage insurance policy for her house at $2000,would she buy the insurance?
A)​Yes because she gets to now enjoy her wealth risk-free
B)No,because she can take the risk and be better off
C)Yes,because she gains on average with the insurance
D)​Both A&C

Quizplus · Accepted Answer

The expected loss due to burglary is 30% of $10,000, which is $3,000. Paying $2,000 for insurance saves her from this expected loss, making her better off on average. Additionally, with insurance, she eliminates the risk of losing $10,000, allowing her to enjoy her wealth without worrying about burglary.

​Scatterbrain Samantha Often Forgets to Lock Her House

Scatterbrain Samantha Often Forgets to Lock Her House