# Suppose you are selling car insurance. You have a customer with the utility function U(w)=600-200 Where...

###### Question:

Suppose you are selling car insurance. You have a customer with the utility function U(w)=600-200 Where w is the customer's wealth. With probability 0.1, this customer is going to get into an accident while driving. If there is an accident, the customer would have to pay for all the damages and would end up with wealth of $1. The customer has a 0.9 probability of not getting into an accident, and if this were to happen, the individual would get to keep his entire wealth of$100. (a) (10 mark) Suppose you want to maximize profit. What price of insurance would you charge the customer for full insurance? That is, what is the customer's maximum willingness to pay for full insurance? (b) (10 mark) What is your expected profit with the insurance price found in (a)? Suppose you are charging $50 for the insurance premium (instead of the price you found in (a). Suppose the probability of accident is q instead of 0.1) (c) (10 mark) What is the smallest value of q so that the customer purchases insurance? Suppose you are charging$50 for the insurance. And suppose the customer who purchased the insurance has a probability of accident, q=1/99, if he drives carefully. In this case (driving carefully), the utility function is the same as before U(w) = 600 - (200/w) If the customer drives recklessly, he gets +1 util because it gives him the thrill U(w)=601-200/w) while increasing 4 to 4 = 1/10. (d) (30 marks) Consider the following three cases. Case C: The customer does not purchases insurance and drives carefully Case A: The customer purchases insurance and drives recklessly Case B: The customer purchases insurance and drives carefully Which of the 3 options will the customer choose? (Hint: compare the EU for each case) To mitigate this moral hazard problem, you introduce deductible of S40 into the insurance policy. If it is mandated by law that all drivers must purchase insurance, (e) (20 marks) With such insurance with a deductible, how will the customer drive? Recklessly or carefully? (Hint: compare the EU for each case)

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Recording Error Corrections Related to Equipment On April 1, 2021, the following 2020 errors were discovered after the 2020 financial statements were issued. a. Equipment purchased on January 1, 2020, with a cost of $28,000, salvage value of$1,680, and useful life of 8 years was incorrectly expense...