Question: Values in this problem are given as utility equivalents, meaning you do not need a utility function for this problem. Let the value of driving

  • Values in this problem are given as "utility equivalents", meaning you do not need a utility function for this problem. Let the value of driving be equal to D. In a given year, when drivers fully stop at stop signs 100% of the time, the probability of an accident is 1%. The average value of a physical injury is $100,000. Drivers however are always in a rush and get a benefit of $5,000 for stopping at stop signs only 70% of the time. When drivers fully stop at stop signs 70% of the time, the probability of an accident increases to 10%.
  • (a) what is the expected value to drivers fully stopping 100% of the time
  • (b) what is the expected value to drivers of fully stopping 70% of the time
  • (c) what is the cost of an AFI policy if drivers stop 100% of the time; what is the cost of an AFI policy if drivers stop 70% of the time
  • If insurance to cover loss is available at a premium of 5,000, what is the average per policy profit to the insurance company?

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