Suppose Travel Guard flight insurance, which provides surviving family members $500,000 if a passenger is kiled...

  

Transcribed Image Text:

Suppose Travel Guard flight insurance, which provides surviving family members $500,000 if a passenger is kiled on a fight, sells for $23. If the probability of besing in a crash were as high as the frequency in 2001, 0.00000077, what would be a fair price? The price of fair fight insurance is s 0.385 ) (Enter your response rounded to three decimal places.) Use a graph to illustrate why a risk averse person might buy unfair insurance. Show on the graph the risk premium that the person would be willing to pay. Suppose the figure to the right shows a passenger's utility from income of $0 (point a), utility from income of $500,000(point b), and expected utility from a 0.000000027 probability of reoeiving $500,000 and a 0.99999923 probability of recelving $0.00 (point c). 1.) Using the line drawing tool, show the actual risk premium on the graph. Label this line "Risk premium. 2) Using the paint drawing tool, identity a point that corresponds to a perceived expected value and a perceived expected utility from insurance by a risk averse person such that she purchases fight insurance that is unfair. Label this point 'd.' Carefully follow the instractions above, and only draw the requirad objiects. U(500,000) U(0.385) 0.385 500,000 Wealth n Kan Suppose Travel Guard flight insurance, which provides surviving family members $500,000 if a passenger is kiled on a fight, sells for $23. If the probability of besing in a crash were as high as the frequency in 2001, 0.00000077, what would be a fair price? The price of fair fight insurance is s 0.385 ) (Enter your response rounded to three decimal places.) Use a graph to illustrate why a risk averse person might buy unfair insurance. Show on the graph the risk premium that the person would be willing to pay. Suppose the figure to the right shows a passenger's utility from income of $0 (point a), utility from income of $500,000(point b), and expected utility from a 0.000000027 probability of reoeiving $500,000 and a 0.99999923 probability of recelving $0.00 (point c). 1.) Using the line drawing tool, show the actual risk premium on the graph. Label this line "Risk premium. 2) Using the paint drawing tool, identity a point that corresponds to a perceived expected value and a perceived expected utility from insurance by a risk averse person such that she purchases fight insurance that is unfair. Label this point 'd.' Carefully follow the instractions above, and only draw the requirad objiects. U(500,000) U(0.385) 0.385 500,000 Wealth n Kan

Answer rating: 100% (QA)

Proo os crawh Now Compent ation ... View the full answer