Tag Archives: Insurance

Test Your Intuition (11): Is it Rational to Insure a Toaster

Here is a question from last year’s exam in the course “Basic Ideas of Mathematics”:
 
You buy a toaster for 200 NIS ($50) and you are offered one year of insurance for 24 NIS ($6).
 
a) Is it worth it if the probability that damage covered by the insurance will occur during the first year is 10%? (We assume that without insurance, such damage makes the toaster a “total loss”.)
 
b) Is it worth it if the probability that the toaster will be damaged is unknown?
 
As an additional test of your imagination, can you think of reasons why buying the toaster insurance would be rational?