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Case Study: Suppose individuals have a utility function given by ??(??) = square root ??. All individuals havethe same utility function but have different probabilities of having an accident. Assumegroup 1 individuals start with a wealth of $100 and face a .5 probability of having anaccident. Assume group 2 individuals start with a wealth of $100 and face a .2probability of having an accident. If an accident occurs both groups will lose $36.Suppose there were very few high-risk individuals in the economy but the insurancecompany was totally unaware that the high risk population existed. Assume also thatthere is only one insurance company (so no competition and thus the insurancecompany offers a full-insurance coverage contract to the low risk individuals andcharges premiums to low risk consumers that extract their full willingness to pay forthis contract).
Question a) What would the premium be to the low risk consumer?
Question b) How much would the insurance company make on each low-risk consumer?
Question c) How much would the insurance company lose on each high-risk consumer?
Question d) Show, using the diagram that we utilized in class (where the horizontal axisis wealth in the non-accident state and the vertical axis is wealth in the accident state)the iso-expected utility curve for the low and high risk person through the contractpurchased by the low risk consumers. Include the EL line we used in class to showthat the insurance company makes money on a low risk consumer.
If a monopolist has constant marginal cost MC =20 and faces demand p=80-Q, what is the effect on consumer surplus of a $5 per-unit tax on sellers? Is the tax revenue collected less than, equal to, or greater than the consumer surplus loss plus the re..
Suppose that inventories fall by $2 billion, consumption increases by $8 billion, unemployment insurance payments decline by $4 billion, and imports rise by $1 billion. By how much should measured GDP change?
See "Consider This" on page 97 titled "Street Entertainers." Why do street performers face a free-rider problem? How do they try to reduce this problem? Discuss
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Consider the market for a product that can be described as a monopoly. The demand function for this product is given by Qd= 100/P^2
Pic Inc. produces plastic toothpicks that it sells to distributors in the Southwest. Assuming that the market for plastic toothpicks most closely resembles that of perfect competition and that other firms in the industry do not experience similar cos..
Consider a consumer who has utility function u(x, y) = min{2x, 3y} where x, y are amounts of goods X, Y consumed respectively. If there is an inflation which doubled the prices px, py as well as the wealth w. Consumer preference is still the same as ..
Hart's Floral Shop sells bouquets for special occasions. Annual demand is 500? bouquets, the? company's cost to place an order with its vendor is? $25, and the cost to hold a bouquet in inventory for a year is? $15. If Hart orders from its vendor in ..
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q.1. what are the reservation values you calculated for bel vino and star shine? explain briefly justify your
For each of the following transactions identify by how much M1 and M2 change. (a) Your grandmother gives you a check for $250 as a present for your birthday. You deposit the check into your checking account. You then withdraw $50 as cash and transfer..
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