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Deducing the Right Prices You are in charge of determining prices for Marple Insurance, a small insurance firm that operates in southwest England. You offer
Deducing the Right Prices
You are in charge of determining prices for Marple Insurance, a small insurance firm that operates in
southwest England. You offer home insurance in the villages of St Mary Mead, Kings Abbot, and
Styles St Mary all of which are the same size A resident of any of these villages has a net worth of
including the value of their home, which is half of their net worth, ie The utility of
an individual for a wealth including the value of their home is given by
#
However, the chance of a catastrophic event destroying a home varies by village: it is
$ in Styles St
Mary,
in Kings Abbot, and
& in St Mary Mead over the relevant time period. You are required by
law, however, to offer the same price to consumers in all three villages.
a What price will you charge for insurance? Which villages do you expect to serve? What are
your expected profits? points
b Regulators have come to realize that St Marys Mead is a uniquely dangerous place. For this
reason, they have decided that you may charge residents of St Marys Mead a different price
than residents of other villages. What price will you now charge residents of St Marys
Mead? Residents of other villages? Why did your pricing for villagers outside of St Marys
Mead change? points
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