Expected Value Decision Purchase Car Rental Insurance 37285

Suppose that a car rental agency offers insurance for a week that will cost $10 per day. A minor fender bender will cost $1,200, while a major accident might cost $10,000. 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 a major accident is 0.06%, and that the probability of a fender bender is 0.15%. What is the expected value decision? Would you choose this? Why or why not? What would be some alternate ways to evaluate risk?

Prof. Angela


Calculate Price

Price (USD)