Chapter 9.2, Problem 9.26ACB

Making high-stakes insurance decisions. The Journal of Economic Psychology (September 2008) published the results of a high-stakes experiment where subjects (university students) were asked how much they would pay for insuring a valuable painting. The painting was threatened by both fire and theft, hence, the need for insurance. Of interest was the amount the subject was willing to pay (WTP) for insurance (thousands of dollars). For one part of the experiment, a total of 252 subjects were randomly assigned to one of three groups. Group 1 subjects (n₁ = 84) were informed of the hazards (both fire and theft) but were not told the exact probabilities of the hazards occurring. These subjects provided a separate WTP value for fire and theft. Group 2 subjects (n₂ = 84) were also informed of the hazards (fire/theft) and were not told the exact probabilities of the hazards occurring. However, these subjects provided a single WTP value covering both fire and theft. Group 3 subjects (n₃ = 84) were told of the hazards in sequential order (fire first, then theft). After being given the exact probability of fire occurring, the subjects provided a WTP value for fire. Then they were given the exact probability of theft occurring and were asked to provide a WTP value for theft. The researchers investigated whether the mean total WTP value differed for the three groups.

1. a. Explain why the experimental design employed is a completely randomized design.
2. b. Identify the dependent (response) variable and treatments for the design.
3. c. Give the null and alternative hypotheses of interest to the researchers.
4. d. Use a random number generator to randomly assign each of the 252 subjects to one of the three groups. Be sure to assign 84 subjects to each group.