Your friend and you are both shopping for car insurance. Suppose you are equally likely to...

Your friend and you are both shopping for car insurance. Suppose you are equally likely to get in a car accident and both of your cars are worth the same. You are less risk averse than your friend. Therefore your friend is willing to pay more for an insurance policy than you that completely covers the loss in case of an accident.

True of False?

Solutions

Expert Solution

Firstly, before proceeding for any insurance we always need to keep one thing in mind, that big name companies have duped people into thinking that an auto insurance is some sort of "off the shelf" product where "one size fits all" approach fits. This is a fallacy and doesn't hold true. Moreover, this case I being less risk averse or more risk talking has nothing to do with my friend willing to pay more for an insurance policy that completely covers the loss in case of an accident as both the events are mutually exclusive. So the answer is False.

However, if the friend is willing to pay more it is because that he is more risk averse or more inclined to not take risks hence he is willing to pay more premium.

orchestra answered 1 year ago

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