Continuing with the same family from the preceding question,suppose a risk neutral insurance company exists to provide vacation insurance.Suppose further that each vacation day requires a constant expenditure,and this expenditure is standard across everybody. This allows us to simplify the problem by considering all payments to be in terms of vacation days. What is the least the insurance company would charge (in terms of vacation days)?
A)3
B)4
C)5
D)6

Question

Quizplus · Accepted Answer

The insurance company would charge the least amount that would make them indifferent between providing insurance and not providing insurance. This amount is equal to the expected loss, which is the probability of a loss multiplied by the size of the loss. In this case, the probability of a loss is 1/2, and the size of the loss is 3 vacation days. Therefore, the insurance company would charge 3 vacation days.

Continuing with the Same Family from the Preceding Question,suppose a Risk