Question: Suppose all individuals have a utility function of = , where C is the amount of consumption a person has in any given period. There

Suppose all individuals have a utility function of = , where C is the amount of consumption a person has in any given period. There are two types of people: those at high risk, with a 4% chance of accident, and those at low risk, with a 2% chance of accident. Half of individuals are high risk, and half are low risk. The income of all individuals is $40,000 per year, and a catastrophic accident costs $30,000 in the year of the accident.

A. Calculate the actuarially fair insurance premium for each type of person, assuming the insurance company can identify who is high risk and who is low risk.

B. How much will a highrisk individual be willing to pay for insurance?

C. How much will a lowrisk individual be willing to pay for insurance?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!

Suppose all individuals have a utility function of U = C, where C is the amount of consumption a person has in any given period. There are two types of people: those at high risk, with a 4% chance of...

Suppose all individuals have a utility function of U = 2 x C 0.5, where C is the amount of consumption a person has in any given period. There are two types of people: young and healthy, with a 1%...

Suppose all individuals have a utility function of U = , where C is the amount of consumption a person has in any given period. There are two types of people: those at high risk, with a 4% chance of...

Suppose all individuals have a utility function of U= Vc, where Cis the amount of consumption a person has in any given period. There are two types of people: those at high risk, with a 4% chance of...

Consider a two period small open economy, where the representative con- sumer has the following utility function logo + Blog ca Assume also that consumption in each period t (t = 1,2) is a composite...

need help with this problem Consider a two period small open economy, where the representative con- sumer has the following utility function loge + log C2 Assume also that consumption in each period...

Please explain Suppose there are two types of people, high risk (H) and low risk (L) with utility function U (o) = c\". Each has income (=consurnption) of $100. The high risk people are 10% of the...

gchdhfgf f ytg kf jht f We consider a two-period endowment economy. Suppose you have the following utility function U(c,c)=lnc+lnc where c and c refer to consumption in the first and second periods,...

We consider a two-period endowment economy. Suppose you have the following utility function U(c,c)=lnc+lnc(0 where c and c refer to consumption in the first and second periods, respectively, and =...

Yes Use the social security model developed in chapter 10 to answer this question. Each period there are N old people and N' young people, with N' = (1 + n). Suppose that the government establishes a...

One field representative services five customers for a computer manufacturer. Customers request assistance at an average (Poisson-distributed) rate of once every four workdays. The field...

What nominal annual rate of interest is paid on RRSP contributions of $1100 made at the end of each quarter for 15 years if the balance just after the last contribution is $106 000?

How does a company s sustainability efforts help the company attract, retain, and develop employees? Explain your answer.

Kenworth Company uses a job-order costing system. Only three jobsJob 105, Job 106, and Job 107were worked on during November and December. Job 105 was completed on December 10; the other two jobs...

Mackenzie Inc. uses a perpetual inventory system and has prepared the following adjusted trial balance on December 31, 2016: Required: Prepare in proper form for 2016 the companys: (1) Income...

In a Harris Interactive poll of 2,303 adults, 26% said that they believe in astrology. a. Find the true number of the poll respondents who believe in astrology. b. Is the number of respondents who...

According to a candy company, packages of a certain candy contain 16% orange candies. Find the approximate probability that the random sample of 300 candies will contain 20% or more orange candies....

Sportway Inc. produces high-quality tennis racquets and golf clubs using a patented forming process and high-quality hand-finishing. Products move through two production departments: Forming and...

Q2. A supplier is selling a product in two cities; Adana and zmir. It costs him $3 per product delivered in each city. Let pi be the price of product in Adana and p2 be the price of product in zmir....

9. Imagine that you have achieved the goal you set for yourself in task 8. a. What do you see in the past? b. How do you feel? c. What do you hear? d. How does this change your roles? e. How does...

8. Set a goal that you really want to achieve in the near future, lets say 12 years. How does this goal fit in relation to the form roles and values above? What role and what value was it that...

7. Fill out the form below. Only the most important roles and your basic values are to be filled.