# You are a relatively safe driver. The probability that you

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?
Related Book For

Microeconomics

2nd edition

Authors: Douglas Bernheim, Michael Whinston

ISBN: 978-0073375854

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