Find risk premium and actuarially fair insurance premium

Assignment Help Microeconomics
Reference no: EM13945813

Lewis and Martin are successful comedians who get utility (U) from consumption (C). They each have the same utility function U(C)=ln(C), where ln is the natural logarithm. (This function, like the square root function used in the lecture, also demonstrates decreasing marginal utility of consumption. You can find the natural logarithm on any scientific calculator or google can calculate it too.) They each have income of $1000.

As is common with celebrities, occasionally they get sued for a variety of transgressions.

The costs of going to court are $500. There is a 10% chance that Lewis goes to court, and 25% that Martin goes to court. There is an insurance product called "liability insurance" that can protect individuals against lawsuits.

a. Calculate the risk premium and actuarially fair insurance premium for full insurance for each.

b. That is, an insurance policy that replaces 100% of the lost consumption.

c. Suppose the insurance company is unable to distinguish between the riskiness of Lewis and Martin. What would the actuarially fair premium be if the government required them to buy the insurance? (Liability insurance is often required for certain enterprises.)

Reference no: EM13945813

Questions Cloud

Describe the 2 access methods : Research and comparatively analyze Ethernet's CSMA/CD and Token Ring's token passing.
Write an essay about saudi ariban culture : Essay about Saudi Ariban culture, Write an essay (graduate students - 650 word minimum; undergraduate students - 500 word minimum) about your cultural background
Find the petroff no-load torque : Find the Petroff no-load torque for the journal bearing in Case Study 10B. Find the minimum film thickness for a bearing with these data: 45mm dia, 30 mm long, 0.001 clearance ratio, 2500 rpm, ON=25, ISO VG 220 oil at 200 degrees F.
Use short answers to explain the difference between them : Transmission Control Protocol (TCP) and Internet Protocol (IP)
Find risk premium and actuarially fair insurance premium : Suppose the insurance company is unable to distinguish between the riskiness of Lewis and Martin. What would the actuarially fair premium be if the government required them to buy the insurance? (Liability insurance is often required for certain en..
Whose narrative tone is critical of leonardo contributions : View the video, "The Mona Lisa - Every Picture Tells a Story", produced by the BBC Chanel 5, whose narrative tone is critical of Leonardo's contributions. Then submit a minimum 150 word response that addresses the main ideas and themes
Describe protocols at the different layers of the osi model : Describe protocols at the different layers of the OSI model and explain their functionality
Advantages of using this equalization preamplifier : The purpose of this lab is to allow students with the opportunity to pull from all of the concepts presented in the course and be able to construct a circuit for a real time industry application. This lab will showcase all that was learned in the ..
How many 512 byte blocks are required to store a 1.6mb file : Suppose that the keyboard device stored keystrokes in a buffer until it was full then sent the entire buffer for processing. What would be some adverse consequences?

Reviews

Write a Review

Microeconomics Questions & Answers

  The new york times reported that the fda was holding

Consumers stand to benefit from more accurate and informative advertising. Accept, for the sake of argument, that the advertisements do create a false impression. Pharmaceutical companies, publishers, and broadcasters have an interest in maintaining ..

  Inputs of labor total product marginal product

Inputs of labor Total Product Marginal Product

  Question 1lasting toys is experiencing quality problems on

question 1lasting toys is experiencing quality problems on its assembly line. every defective toy that leaves the

  Assume that the yield curve is initially upward-sloping

Assume that the yield curve is initially upward-sloping. Now suppose that the central bank announces a large monetary policy contraction. Given this information, we would expect which of the following to occur?

  You have been retained by xyz university as a consultant to

you have been retained by xyz university as a consultant to make recommendations andor proposals for the marketing of

  Label the substitution and income effects

Label the substitution and income effects.

  Do you need more information

Is the following, true, false, or do you need more information? Airlines should charge $1,300 for a first class ticket

  What happens in the market for a drug once the patent expire

What happens in the market for a drug once the patent expires? Why?

  What are some of the incentives to consolidate

In a separate group discussion board, present two arguments. The first should argue in favor of the proposed merger, from the perspective of the firms. The second agrues against the proposed merger from the perspective of the broader public intere..

  Prepare an essay on minimum wages

Prepare an essay on Minimum wages are likely to harm those they are designed to help.

  How can inflation affect a business in the short-term

How can inflation affect a business in the short-term and long-term? Please back up your argument with at least 500 words in your explanation.

  Why is there less emphasis on the scale of investment effort

Why is there less emphasis on the scale of the investment effort in export-oriented industrialisation than in import-substituting industrialisation strategies?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd