Greta is going to drive cross country. She is worried about getting a flat tire, and is deciding whether to buy a spare tire to keep in her trunk. She believes there is a 10 percent chance that she will get a flat tire on her trip. If she gets a flat and does not have a spare tire, she must call a tow truck which costs $500. Her sister gives her a spare tire for free and she assumes there is no cost to using it if she brings it. She assigns $0 value to not having a flat tire on her trip, and considers herself risk neutral over the range of prospects

In what range is v, her value for the tire?

a. $0 v < $30

b. $30 v < $60

c. $60 v < $90

d. $90 v

Greta realizes that the tire her sister gave her will not work for her car, so she is deciding whether or not to buy a tire for herself. She has reassessed the cost of changing the tire herself, and now decides that if she chooses to buy a spare tire and change her tire itself, the hassle associated with changing the tire is $X. As in Question 1, she always has the option to call a tow truck for $500 if she gets a flat.

Consider the following statements:

If X is $0, the most she should pay for a tire is $50. If X is $10, the most she should pay for a tire is $40.

• Statement I is correct; Statement II is correct
• Statement I is correct; Statement II is false
• Statement I is false; Statement II is correct
• Statement I is false; Statement II is false