Question

2. James has rented a 2019 Ford Mustang at the local Enterprise store for one week and is considering purchasing an insurance. The insurance costs additional $60 per week and insures James for collision types of damages to the vehicle. The following probability distribution shows the anticipated reparation costs to the vehicle and associated probabilities during the rented period. Should James purchase this insurance? (SHOW WORK for credit; 1 point)

   1. Cost of fixing	Probability
      $ 15,000	0.05%
      $ 10,000 5,000 1,500 500	0.1% 0.5% 1.15% 1.5%

Answer 1

Solution:

To determine whether James should purchase this insurance, we, first need to find the expected value:

The net cost of fixing and their corresponding probabilities are given below:

Net cost of fixing	Probability
15000 - 60=14940	0.0005
10000-60=9940	0.001
5000-60=4940	0.005
1500-60=1440	0.0115
500-60=440	0.015
-60	0.967

Now the expected value is:

Since the expected value for James is $7.25, therefore, James should purchase this insurance