Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

pleasze sketch for my understanding: please graph and help me understand follwint question: Suppose individuals have a utility function given by () = square root

pleasze sketch for my understanding: please graph and help me understand follwint question: Suppose individuals have a utility function given by () = square root . All individuals have the same utility function but have different probabilities of having an accident. Assume group 1 individuals start with a wealth of $100 and face a .5 probability of having an accident. Assume group 2 individuals start with a wealth of $100 and face a .2 probability of having an accident. If an accident occurs both groups will lose $36. Suppose there were very few high-risk individuals in the economy but the insurance company was totally unaware that the high risk population existed. Assume also that there is only one insurance company (so no competition and thus the insurance company offers a full-insurance coverage contract to the low risk individuals and charges premiums to low risk consumers that extract their full willingness to pay for this contract). a) (10 points) What would the premium be to the low risk consumer? b) (10 points) How much would the insurance company make on each low-risk consumer? c) (10 points) How much would the insurance company lose on each high-risk consumer? d) (20 points) Show, using the diagram that we utilized in class (where the horizontal axis is wealth in the non-accident state and the vertical axis is wealth in the accident state) the iso-expected utility curve for the low and high risk person through the contract purchased by the low risk consumers. Include the EL line we used in class to show that the insurance company makes money on a low risk consumer.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Math For Business And Finance An Algebraic Approach

Authors: Jeffrey Slater, Sharon Wittry

1st Edition

0077639626, 9780077639624

More Books

Students also viewed these Economics questions

Question

Name the four sections that make up the cost production report. lp5

Answered: 1 week ago