Determine the optimal amount of precaution the homeowner

Reference no: EM131309573

Consider the graph in the next column, which demonstrates the costs and benefits of theftproofing one's home. The marginal costs increase as more precaution is taken: It's cheap to install good locks, but more difficult to install invisible laser intruder-detection systems. The marginal benefit declines as more precaution is taken: If I am a burglar, adding a guard dog isn't going to provide much deterrence if you already have an electric fence and 30 locks on each door and window.

a. Determine the optimal amount of precaution the homeowner would take if theft insurance were unavailable.

b. Suppose that the homeowner can obtain an insurance policy that covers half of any losses he might suffer. Assuming that the marginal benefit curve represents dollar losses to the homeowner, shift the marginal benefit curve an appropriate distance and determine what happens to the homeowner's optimal amount of care.

c. Suppose that the insurance company decides to institute a deductible: The homeowner pays the first $1,000 of losses, and after that the insurance company splits the losses with the homeowner 50-50. Shift the marginal benefit curve by an appropriate amount (be sure to indicate the magnitude of the shift in an appropriate fashion). What effect does the deductible have on the precautions taken by the homeowner?

Reference no: EM131309573

Questions Cloud

Communication barriers between a manager and an employee : Identify communication barriers between a manager and an employee.- Identify communication barriers between a retail sales representative and a customer.

How does this affect their views on citizenship : How does participation differ between the duty-based citizen and the engaged citizen?How do the older generation's and the younger generation's views on certain issues, such as tolerance, differ? How does this affect their views on citizenship? ..

Which category of communication barriers verbal or nonverbal : Which category of communication barriers-verbal or nonverbal-do you believe is easier to overcome? Why?- Write an email to a colleague who is also an expert on the subject.

What affects our demand for money : Why do people hold money and what affects our demand for money?

Determine the optimal amount of precaution the homeowner : Suppose that the homeowner can obtain an insurance policy that covers half of any losses he might suffer. Assuming that the marginal benefit curve represents dollar losses to the homeowner, shift the marginal benefit curve an appropriate distance ..

Determine the skills required for each role : Identify the roles needing to be filled. Determine the skills required for each role. Determine the skill sets of the team members. Assign team members to roles.

Calculate the price elasticity of demand : Calculate the price elasticity of demand. Should the vending machine company raise its price? Explain the economic basis for this recommendation to the president. By how much the quantity demanded has to decrease in order for your recommendation in ..

Find an example of print communication : Find an example of print communication, for example, a flyer on campus, a newsletter, or a magazine ad.- With a partner, discuss why the creator of the message may have chosen a print medium.

What is life like in guatemala : Do you think that North American culture contributes to environmental issues? Why or why not?2. Malthus argued that the world was going to run out of food as the population continued to grow. Do you think this is still a concern today? Why or why n..

User Account

All Pages