Chapter PIV, Problem 8RE

To determine

To explain: that the researcher can purchase the policy with or without the deductible on the basis of this knowledge and how the importance of the researcher will affect this decision.

Explanation of Solution

Given:

X is the amount expenditure for the repair.

The expected money spent is,

X	C_500	12
P(X)	0.005	0.995

Calculation:

Suppose, C is the expense of repairing the vehicle following an accident at fault.

  $\begin{array}{c}\left(C-500\right)0.005+12\left(0.995\right)=0.005C-500\left(0.005\right)+12\left(0.995\right)\\ =0.005C-14.44\end{array}$

The expenditure becomes zero.

0.005C-14.44 > 0

  $\begin{array}{c}C>\frac{14.44}{0.005}\\ =\$2,888\end{array}$

It is fair to take the policy if the repair value is greater than $2888. It is prudent to seek the policy if the value of the car is quite large than $2888.