There are three kinds of individuals in a community: a low risk type (L) whose probability of getting disabled is 5%, a medium risk type (M) whose probability of getting disabled is 10% and a high risk type whose probability of getting disabled is 60%. If they are not disabled, they can earn an income of 500/ and in the case they are disabled they will have an income of just 10/- All individuals are risk averse and have a utility function given by In w, where w is the income. a. What is the actuarially fair premium for types L, M and H respectively? b. What is the maximum premium that the insurance company can charge so that all types choose to buy the insurance, given that the insurance company has no means to tell which individual is of which type? c. Suppose the community has equal number of citizens belonging to each type. If the insurer charges the premium amount you calculated in part b above, what will be its profits?
There are three kinds of individuals in a community: a low risk type (L) whose probability of getting disabled is 5%, a medium risk type (M) whose probability of getting disabled is 10% and a high risk type whose probability of getting disabled is 60%. If they are not disabled, they can earn an income of 500/ and in the case they are disabled they will have an income of just 10/- All individuals are risk averse and have a utility function given by In w, where w is the income. a. What is the actuarially fair premium for types L, M and H respectively? b. What is the maximum premium that the insurance company can charge so that all types choose to buy the insurance, given that the insurance company has no means to tell which individual is of which type? c. Suppose the community has equal number of citizens belonging to each type. If the insurer charges the premium amount you calculated in part b above, what will be its profits?
Chapter16: Labor Markets
Section: Chapter Questions
Problem 16.9P
Related questions
Question
A5
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you