Question

Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance.

If the insurance company can successfully screen both Nadia and Samantha into appropriate contracts, it would earn:_______

a. $3500 loss.
b. Between zero and $200.
c. Between zero and $200 loss.
d. $3500 gain.

Answer 1

Option B, between zero and $200, is the right answer.

Step-by-step explanation:

The probability that the car of Nadia can be theft = 10%

The probability that the car of Samantha can be theft = 25%

Here, both Nadia and Samantha are agreed or willing to pay the premium for insurance = $100

Since both pay the $100 premium each then the total revenue of the company will be $200. This is the maximum amount that the company can make. However, if the minimum amount is zero when both don’t take insurance. Thus, option B, between zero and $200 is correct.