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5. Suppose you are given the following information about the potential purchase of an insurance policy: Risk premium Expected benefits of this policy Expected welfare
5. Suppose you are given the following information about the potential purchase of an insurance policy: Risk premium Expected benefits of this policy Expected welfare loss $100 $1,000 $300 a. If the loading fee (L) is 20%, what is the premium (R) the insurance company would charge for this policy? (8 points) b. Given the information above, how much would the consumer be willing to pay for this policy? (8 points) c. Given the answers to parts a and b, should the consumer buy this policy? Explain your answer. (8 points) d. Give a short definition of what a risk premium of $100 means. (8 points) e. The problem suggests the consumer would suffer an expected welfare loss of S300 due to ex post) moral hazard. Give a short definition of (ex post) moral hazard. (8 points) 5. Suppose you are given the following information about the potential purchase of an insurance policy: Risk premium Expected benefits of this policy Expected welfare loss $100 $1,000 $300 a. If the loading fee (L) is 20%, what is the premium (R) the insurance company would charge for this policy? (8 points) b. Given the information above, how much would the consumer be willing to pay for this policy? (8 points) c. Given the answers to parts a and b, should the consumer buy this policy? Explain your answer. (8 points) d. Give a short definition of what a risk premium of $100 means. (8 points) e. The problem suggests the consumer would suffer an expected welfare loss of S300 due to ex post) moral hazard. Give a short definition of (ex post) moral hazard. (8 points)
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