Written Assignment Instruction: For this assignment you will need to access the file titled “Car Rental”. You can find this file in Week 8 assignment link. 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%. Analyze the calculations and answer the following questions: Please write your answers in essay form using MS Word, doc or docx files. Please make sure you adhere to APA guidelines. Submit your assignment in the designated area in Week 8. Please be mindful of the deadline.

Based on the given information, we are tasked with analyzing the decision of whether or not to purchase insurance from a car rental agency. The insurance is offered at a cost of $10 per day for a week, and it provides coverage for any damages incurred during the rental period. The potential damages that we need to consider include a minor fender bender, which would cost $1,500 to repair, and a major accident, which would require $15,000 for repairs.

Before making a decision, we need to calculate the expected costs associated with each option. To do this, we will consider the probabilities of the different events occurring. We are told that the probability of a major accident is 0.05%, while the probability of a fender bender is 0.16%.

Let’s start by calculating the expected cost if we choose not to purchase insurance. In this case, we would be personally liable for any damages that occur. Since there are three possible outcomes – no accident, a fender bender, and a major accident – we need to calculate the expected cost for each outcome and then sum them up.

The expected cost for no accident is $0, as there would be no damages to repair. The expected cost for a fender bender is calculated by multiplying the cost of repair ($1,500) by the probability of it occurring (0.16%). Therefore, the expected cost for a fender bender is $1,500 * 0.16% = $2.40.

Similarly, the expected cost for a major accident is calculated by multiplying the cost of repair ($15,000) by the probability of it occurring (0.05%). Hence, the expected cost for a major accident is $15,000 * 0.05% = $7.50.

Finally, we can calculate the total expected cost if we choose not to purchase insurance by summing up the expected costs for each outcome. Therefore, the total expected cost is $0 + $2.40 + $7.50 = $9.90.

Now, let’s calculate the expected cost if we opt to purchase insurance. In this case, we would pay $10 per day for a week, which amounts to a total cost of $10 * 7 = $70.

Since we are insured, the insurance would cover any damages incurred during the rental period, regardless of the cost. Therefore, the expected cost if we choose to purchase insurance is $70.

Comparing the expected costs for both options, we can see that the expected cost of not purchasing insurance is $9.90, while the expected cost of purchasing insurance is $70. Therefore, from a purely financial standpoint, it would be more cost-effective to not purchase insurance.

However, it is important to consider other factors that might influence this decision. For instance, if the potential financial burden of paying for damages is significant and would cause financial distress, purchasing insurance could provide peace of mind. Additionally, the decision could also be influenced by individual risk tolerance and preferences.

In conclusion, based on the analysis of the expected costs, it would be more financially advantageous to not purchase insurance from the car rental agency. However, personal circumstances and preferences should also be taken into account when making this decision.

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