You are a relatively safe driver. The probability that you will have an accident is only 1 percent. If you do have an accident, the cost of repairs and alternative transportation would reduce your disposable income from $120,000 to $60,000. Auto collision insurance that will fully insure you against your loss is being sold at a price of $0.10 for every $1 of coverage. Finally, suppose that your utility function is U = √I.
You are considering two alternatives: buying a policy with a $1,000 deductible that essentially provides just $59,000 worth of coverage, or buying a policy that fully insures you against damage. The price of the first policy is $5,900. The price of the second policy is $6,000. Which policy do you prefer?