Irvine public school foundation offers an instrument rental program. The price to rent a cello forone school year is $400. If the instrument is damaged or lost, the student’s family is responsiblefor the cost of the instrument. IPSF offers Customer Assurance Program. For a fee of $60 peryear, IPSF will repair damaged instruments or replace lost or stolen instruments. Assume thatthe insurance is fair. Ella’s family has $2,000 and maximizes ?(?)=√?. If Ella’s family does notpurchase insurance, then its expected utility is 39.a. Will Ella’s family purchase insurance?b. What is the price of the instrument? Irvine public school foundation offers an instrument rental program. The price to rent a celloforone school year is $400. If the instrument is damaged or lost, the student's family isresponsiblefor the cost of the instrument. IPSF offers Customer Assurance Program. For a fee of $60 peryear, IPSF will repair damaged instruments or replace lost or stolen instruments. Assume thatthe insurance is fair. Ella's family has $2,000 and maximizes u(w)=√w. If Ella's family does notpurchase insurance, then its expected utility is 39.a. Will Ella's family purchase insurance?b. What is the price of the instrument?

The issue you presented has to do with making decisions in the face of risk and uncertainty,…

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Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 1MC

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Irvine public school foundation offers an instrument rental program. The price to rent a cello for
one school year is $400. If the instrument is damaged or lost, the student’s family is responsible
for the cost of the instrument. IPSF offers Customer Assurance Program. For a fee of $60 per
year, IPSF will repair damaged instruments or replace lost or stolen instruments. Assume that
the insurance is fair. Ella’s family has $2,000 and maximizes ?(?)=√?. If Ella’s family does not
purchase insurance, then its expected utility is 39.
a. Will Ella’s family purchase insurance?

b. What is the price of the instrument?

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