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6 . A farmer can make a profit of 1 0 0 0 if there is no damage to his crop. But if there is
A farmer can make a profit of if there is no damage to his crop. But if there is damage then his profit is only The probability of the crop getting damaged is The farmers utility function is U ln Y where Y is profit. The farmer can purchase insurance against loss q at premium rate pi Premium rate pi means: to insure worth of income the individual pays a premium of pi
a Find the highest premium rate pi at which the farmer would buy full insurance against the entire loss
b Suppose there is only one insurance firm. Find the premium rate pi that maximizes the firms expected profit.
c Suppose that a new insurance firm enters the market. Let pi denote the premium rate offered by the incumbent firm and pi by the new firm. The farmer chooses the firm that offers the lowest premium rate. Find the equilibrium premium rates.
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a To find the highest premium rate at which the farmer would buy full insurance against the entire l...Get Instant Access to Expert-Tailored Solutions
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