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1. Consider the problem we worked through in class. The purpose of this homework question is for you to be able to replicate the results.
1. Consider the problem we worked through in class. The purpose of this homework question is for you to be able to replicate the results. We are assuming that Pm = $500, C = 20, and L = .10 State of the World Probability al = .30 12 = .10 7:3 = .60 Uninsured Demand ml = 3 m3 = 8 m5 = 0 Insured Demand m2 = 4 m4 = 9 mb=0 $500 cipu 34 M a. Calculate the expected benefits, E(B), the insurance company will have to pay b. Calculate the premium, R, charged by the insurance company, ignoring any tax subsidy. c. Calculate the expected welfare loss, E(WL), from buying this policy. (HINT: the expected welfare loss is the sum of the areas of the two triangles times their probabilities.) d. If the risk premium associated with this policy is $220, how much would the consumer be willing to pay for the insurance? e. Is there a net welfare gain associated with buying this policy? If so, what is it
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