Scenario: Choosing Insurance the Ramirez Family Owns Three Cars and Is

Multiple Choice

Scenario: Choosing Insurance The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs.They face two possible states: state 1, in which their cars need no repairs and their income available for purchasing other goods and services is equal to $50,000; and state 2, in which their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000.The probability of repairs is 10%, while the probability of no repairs is 90%.
(Scenario: Choosing Insurance) Refer to the information in the scenario Choosing Insurance.The Ramirez family can buy insurance that will cover the full cost of repairs for $2,000.If family
Members are risk-averse and want to maximize their expected utility:

A) they will buy the insurance.
B) they will be indifferent between buying and not buying the insurance, since their expected income for purchasing other goods and services is $48,000 regardless of what they do.
C) they will buy the insurance as long as the utility of having a certain income of
$48,000 to buy goods and services other than car repairs is higher than the utility associated with their expected income without insurance.
D) they will self-insure.