Consider the following car insurance problem. A car accident occurs with probability 1/36. The loss from...

Consider the following car insurance problem. A car accident occurs with probability 1/36. The loss from the accident is $4,000. The price of the coverage is $150. Should a wealthy person purchase the coverage?

Expert Solution

Probability of car accident = (1 / 36)

Loss from accident = 4,000

Expected loss from accident = Probability of car accident * Loss from accident = [(1/36) * 4,000] = 111.11

As price of coverage is more than expected loss from accident, wealthy purchase should not purchase the insurance.

Rahul Sunny answered 2 years ago

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