Suppose a company offers a standard insurance contract with a premium (r) of $1,000 and a payout (q) of $8,000. Suppose that Rock earns a healthy state income of $50,000, a sick state income of $20,000, and has a 12.5% chance of becoming ill. From this information, you can determine that the expected profit for the insurance company is likely: negative zero
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- A fair health insurance contract means that the expected payout is equal to the premium the expected income is equal to the difference between the expected loss and the expected payout the expected loss is equal to the expected payout the premium is equal to the expected income Consider an individual who has a healthy state income of $10,000 and a sick state income of $2,000. The probability of illness is 30%. If the individual is going to be better off with an insurance contract, it must be that their expected income does not change the insurance contract is full there is not enough information their expected utility does not changeSuppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $___Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $ 25500. (Enter your response rounded to the nearest dollar.) Which of the following would best "solve" the asymmetric information problem in this market? O A. Prohibiting the sale of low-quality cars. O B. High-quality sellers could offer warranties or product guarantees. OC. Low-quality sellers could establish industry standards. O D. It is not possible to solve the asymmetric information problem in this market.
- An individual has the utility function U(I) = I^(1/2), where I is their net income. (Note that I to the exponent/power of 1/2 is the same as the square root of I.) The individual starts with $1600 in income. The individual has a 20% probability of being very sick, 30% probability of being slightly sick, and 50% probability of being healthy. If the individual is sick, they lose net income because they need to pay healthcare costs. The healthcare costs are $1600 if they are very sick, $700 if they are slightly sick, and $0 if they are healthy. Please use this information for the following parts of this question unless otherwise specified. What is the individual's expected utility? Suppose a health insurance company offers the individual a full insurance contract. What is the actuarially fair, full insurance premium for this individual? What is the individual's expected utility if they purchase a full insurance contract at the actuarially fair, full insurance premium?Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15.000. Based on this probability, the most that a buyer would be willing to pay for a used car is S. (Enter your response rounded to the nearest dollar.)Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain
- Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?How would you expected utility change by buying full insurance as opposed to partial (1/2) for an illness that causes your income to fall by 50,000 from your current income of $100,000. The probability of this illness is 25%. U = VC 6.Question 5 Suppose that there is a 10% chance Ja'Marr is sick and earns $10,000, and a 90% chance he is healthy and will earn $70,000. Suppose further that his utility function is the following (utility = square root of income) U (I) = VIncome Ja'Marr's utility from expected income is , and his expected utility of his income is 264.58; 100 248.12; 252.98 100; 265.58 252.98; 248.12
- . Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?Consider an insurance company offer a "standard contract" with the premium r= $100 and payout q=$500 to anyone who will purchase it. Peter has healthy-state income IH $500 and sick-state income Is $0. He has probability of illness p=0.1. Is the standard contract fair and/or full for Peter? If he ends up getting sick, what will his final income be? (please show all your calculations)Lucy, the manager of the medical test firm Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn't sued, the firm expects to earn profit of $120, but if it is successfully sued, its profit will be only $20. Lucy believes that the probability of a successful suit is 20%. If fair insurance is available and Lucy is risk averse, how much insurance will she buy? Lucy will buy insurance that costs her $ when not successfully sued. (Enter your response as a whole number.)