Consider an individual who has an isoelastic utility function with = 3, $350,000 in liquid financial...
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Consider an individual who has an isoelastic utility function with = 3, $350,000 in liquid financial capital and who is considering purchasing fire insurance (full coverage) for their home. • Price of home = $300,000. • The house burns down completely (loss of $300,000) with probability 0.0009. Part A What is the individual's reservation price if they choose no deductible? Suppose they are offered insurance with a premium (price) of $575 and a $50,000 deductible, would they purchase it? Part B Part C How will the insurance premium (price charged by the insurance provider) vary with the size of the deductible? Explain by commenting on the basic factors involved in pricing insurance. (Note: This is not a trick question and should be (hopefully is) intuitive.) Consider an individual who has an isoelastic utility function with = 3, $350,000 in liquid financial capital and who is considering purchasing fire insurance (full coverage) for their home. • Price of home = $300,000. • The house burns down completely (loss of $300,000) with probability 0.0009. Part A What is the individual's reservation price if they choose no deductible? Suppose they are offered insurance with a premium (price) of $575 and a $50,000 deductible, would they purchase it? Part B Part C How will the insurance premium (price charged by the insurance provider) vary with the size of the deductible? Explain by commenting on the basic factors involved in pricing insurance. (Note: This is not a trick question and should be (hopefully is) intuitive.)
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a The individuals reservation price is the price at which they are ind... View the full answer
Related Book For
Auditing A Practical Approach with Data Analytics
ISBN: 978-1119401742
1st edition
Authors: Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton
Posted Date:
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