Question
Consider a risk-averse consumer who has an initial wealth of $1000. With probability 15%, this consumer incurs a loss of $900 due to illness. Suppose
Consider a risk-averse consumer who has an initial wealth of $1000. With probability 15%, this consumer incurs a loss of $900 due to illness. Suppose that this person is indifferent between their endowment and having $500 with certainty.
- What is the actuarially fair rate for $1 of insurance?
- How much insurance will the consumer purchase if they face actuarially fair rates?
- What is the risk premium? Illustrate it.
- Suppose that the consumer faced an insurance premium of $0.56 for a dollar of insurance.
- Does the insurance company earn a profit at these rates?
- Will the consumer purchase any insurance at these rates and, if so, will they fully insured?
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Microeconomics
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson
1st Edition
978-1464146978, 1464146977
