Question

Suppose someone knew the probability of incurring a $10,000 medical expense was 5% and the odds of being healthy and incurring no expenses was 95%. If they used that information to compare the expected cost to them ($500) with the $600 premium it wouldcost to get full coverage and decided to buy the insurance then economists would say they are

a)irrational
b)risk loving
c)risk averse
d)risk neutra

Answer 1

Answer:

c. risk reverse

Explanation:

In this case, the person willing to take insurance is ready to pay an extra $100 ($600 instead of $500) in order to ensure what he will lose. This is done to discard all uncertainty involved to get full coverage. This means the person buying insurance, as per the economists, would go for what is called risk averse. The person going in for risk averse means he is reluctant to take risk. In this case, the buyer pays extra $100 for this purpose.