Management has determined that there is one chance in a thousand of a customer being injured or killed. The settlement of resulting lawsuits has an average cost of $750,000. Insurance with a $50,000 deductible is available. It covers the costs of lawsuits unless there is evidence of criminal negligence. Based on cost-benefit analysis, what are the most that the business should pay for the insurance?

$700

Explanation:

In cost benefit insurance , the intervention and its benefit are evaluated to arrive at the best decision for the insured party.

Working

Potential lawsuits - $750,000

Deductible insurance - $50,000

Possibility of injury /death = 1/1000

Maximum payment for insurance - $(750000-50000)/1000

$700

$700

Explanation:

probability of customer being injured = 1 / 1,000 = 0.001

costs without insurance = $750,000

insurance deductible = $50,000

net legal costs with insurance = $750,000 - $50,000 = $700,000

expected legal costs = $700,000 x 0.001 = $700

so the most that the company should be willing to pay for the insurance policy is $700

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