Suppose that a car rental agency offers insurance for a week that will cost $10 per day. A minor fender bender will cost $1,500, while a major accident might cost $15,000 in repairs. Without the insurance, you would be personally liable for any damages. What should you do? Clearly, there are two decision alternatives: take the insurance or do not take the insurance.
The uncertain consequences, or events that might occur, are that you would not be involved in an accident, that you would be involved in a fender bender, or that you would be involved in a major accident. Assume that you researched insurance industry statistics and found out that the probability of major accident is 0.05%, and that the probability of a fender bender is 0.16%.
Question 1 of 5
What is the expected value to take insurance?
Question 2 of 5
What is the expected value to decline insurance?
Question 3 of 5
What is the probability of no accident?
Question 4 of 5
What is the probability of a major accident?
Question 5 of 5
What is the best expected value decision?
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