Tama is renting a car for 24 hours. The rental fee, which he has already paid, includes a Basic insurance policy. Under this policy, Tama will have to pay the first $3,600 if he is in a car accident (and the rest will be covered by the insurance policy). Any accident, even a minor one, will result in at least $3,600 of repair costs. When picking up the rental car, Tama is asked if he wants to upgrade to a Full insurance policy at a cost of $36. If he purchases the Full insurance policy, he will not have to pay anything if he has an accident. Based on his past driving record, the probability that Tama will have an accident in any 24 hour period is 0.01. Tamas value function is () = /2 for gains and () = 2 || for losses, where is the change in the amount of money he has.

a. If Tamas reference point is that he will not have an accident, what is the value to him of purchasing Full insurance? What is the value to Tama of not purchasing Full insurance? Should he purchase Full insurance? b. If Tamas reference point is that he will have an accident, what is the value to him of purchasing Full insurance? What is the value to Tama of not purchasing Full insurance? Should he purchase Full insurance? In your answers, assume that Tama always integrates when evaluating options that include two or more changes.

c. With reference to your answers above, will requiring customers to pay a $3,600 deposit if they do not purchase Full insurance and asking them if they want to save their deposit by upgrading to Full insurance make it or more or less likely that they will purchase full insurance?