1 answer

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 customers w
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)

Answers

W U(W) = 600 - 200 probability of accident is o.l probability on not getting, accident is 0.9 Initial wealth is $100. While c100 Goo - 2007, 578.2 » 21.87 20 » 0.10971 100-P 01044 700 p = 4.17 < 100-P p < 99.84 PL 90.83 consumers maximum willingness

.

Similar Solved Questions

1 answer
Loge (x-1) e 1 - logs &
loge (x-1) e 1 - logs &...
3 answers
The value of the equilibrium constant, Kc, at a certain temperature is 4.00 x 10-1
The value of the equilibrium constant, Kc, at a certain temperature is 4.00 x 10-1. Would the reaction as represented by the chemical equation favor reactants or products? Enter P or R. N2(g)+3H2(g) = 2NH3(g)...
1 answer
Solve for d As part of a circus performance, a man is attempting to throw a...
Solve for d As part of a circus performance, a man is attempting to throw a dart into an apple which is dropped from an overhead platform. Upon release of the apple, the man has a reflex delay of 205 milliseconds before throwing the dart. If the dart is released with a speed Vo = 16 m/s, at what dis...
1 answer
How do you solve #3p - 4= 3#?
How do you solve #3p - 4= 3#?...
1 answer
1 of5 Problem 15.3 Review Constants Periodic Table Part A you are seated in te mdie...
1 of5 Problem 15.3 Review Constants Periodic Table Part A you are seated in te mdie chaben asound from hesage reaching your ear directly and the same sound reaching your ear ahor rllecting from the back alt? The speed of sound in the air 343 m/s Express you aswer in seconds The back wal of an audito...
1 answer
1) Solve the following system of linear equations using a Gauss Elimination Method (5 pts) 5x1...
1) Solve the following system of linear equations using a Gauss Elimination Method (5 pts) 5x1 + 5x2 + 3x3 = 10 3x1 + 8x2 – 3x3 = -1 4x1 + 2x2 + 5x3 = 4...
1 answer
Draw the structure for Asp-Cys-Gly-Tyr. Draw the molecule on the canvas by choosing buttons from the...
Draw the structure for Asp-Cys-Gly-Tyr. Draw the molecule on the canvas by choosing buttons from the Tools (for bonds an Templates toolbars, including charges where needed. (Express vour answer Enter the one-letter abbreviation for Asp-Cys-Gly-Tyr. Spell out the one-letter abbreviation for the pepti...
1 answer
How many covalent bonds can a single fluorine atom commonly form with other elements? A. 3...
How many covalent bonds can a single fluorine atom commonly form with other elements? A. 3 B. 1 C. 4 D. 2...
1 answer
4. Analysis of international trade. Without trade, PD = $3000, Q = 400. In world markets,...
4. Analysis of international trade. Without trade, PD = $3000, Q = 400. In world markets, Pw = $1200. Y-intercept of Demand curve is $6000. no A linu sit Plasma TVs $3000 $1200 200 400 600 a) Under free trade, how many TVs will the country import or export? b) Calculate CS, PS, and total surplus wit...
1 answer
Which blood type is inherited by incomplete dominance?
Which blood type is inherited by incomplete dominance?...
1 answer
Chapter 10 Brief Exercises 1-5 Badet Reports and Flexible Balets Question 2 Current Attemptin Progres For...
Chapter 10 Brief Exercises 1-5 Badet Reports and Flexible Balets Question 2 Current Attemptin Progres For the quarter ended March 31, 2000, Comory comes the following seduta In the second quarterbuttedes were $30.000 and actual sales were 534,000 Prepare a static budget report for the second quarter...
1 answer
1. We'll use separation of variables to solve the Schrodinger equation in spherical geometry Show...
Quantum Physics 1. We'll use separation of variables to solve the Schrodinger equation in spherical geometry Show, that if the wave function takes the form 9(r,6, o) . R (r) (6)$(o) that the SchrodinDer equation can be separated in three equations d. (sin ) +1(1+1)[email protected] ㎡Θ, and...
1 answer
Recording Error Corrections Related to Equipment On April 1, 2021, the following 2020 errors were discovered...
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...
1 answer
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,220 pe...
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,220 per unit; variable cost = $440 per unit; fixed costs = $4.95 million; quantity = 85,000 units. Suppose the company believes all of its estimates are accurate only to within ± 19 percen...
1 answer
Web and Data Security What is a Basic Service Set? a. a group of wireless devices...
Web and Data Security What is a Basic Service Set? a. a group of wireless devices served by a single AP b. wireless devices set up as a basic ad-hoc network c. a wireless network that does not use an AP d. multiple APs are set up to provide some overlap...
1 answer
Consider a random vector Y () y(2). y(k) where the elements y(i) are made yi)wi), j-1,...
Consider a random vector Y () y(2). y(k) where the elements y(i) are made yi)wi), j-1, ...k where w(j) are independent, identically distributed, Gaussian, zero-mean, and with the variance σ2 i.e., N(0, σ2). 1. Find the Maximum Likelihood (ML) estimator for xr, i.e., ML 2. Find the Mean S...
1 answer
Slavin Corporation manufactures two products, Alpha and Delta. Each product requires time on a single machine....
Slavin Corporation manufactures two products, Alpha and Delta. Each product requires time on a single machine. The machine has a monthly capacity of 500 hours. Total market demand for the two products is limited to 180 units (each) monthly. Slavin is currently producing 110 Alphas and 110 Deltas eac...