Insurance - reducing risk, Microeconomics

Assignment Help:

Insurance

- Risk averse are willing to pay to keep away from risk.

- If cost of insurance equals expected loss, risk averse people will buy sufficient insurance to totally recover from the potential financial loss

* While expected wealth is same, the expected utility with the insurance is greater because the marginal utility in event of the loss is greater than if no loss occurs.

* The purchases of insurance transfers the wealth and increases expected utility.

* The Law of Large Numbers

- Though single events are random and unpredictable, the average outcome of many identical events can be predicted.

* Examples

- A single coin toss versus large number of coins

- Whom will have a car wreck versus the number of wrecks for the large group of drivers

* Assume:

- 10% chance of a $10,000 loss from the home burglary

- Expected loss = .10 x $10,000 = $1,000 having a high risk

- 100 people face same risk

* Then:

- $1,000 premium generates a $100,000 fund to cover the losses

- Actuarial Fairness

When insurance premium = expected payout

Related Discussions:- Insurance - reducing risk

Baumol’s sales revenue maximization theory, Profit maximization is theoreti...

Profit maximization is theoretically the most sound but practically unattainable objective of business firms. In the light of this statement critically appraise the Baumol’s sales

Draw the demand curve - axes, 1. The total demand (marginal benefit) curve ...

1. The total demand (marginal benefit) curve for visiting the Great Barrier Reef is as follows: Price = 5000+100*Fish Biomass (tons per square mile) -10*Number of Trips. a. Do

Graphical representation of various returns, Graphical Representation of Va...

Graphical Representation of Various Returns: Diminishing Returns: If the TP curve is as shown in the adjacent Figure, then the MPL given by tanθ is throughout less than the A

Functions of the central bank, Functions of the Central Bank: Currency...

Functions of the Central Bank: Currency issue and distribution: The Central Bank is the only institution empowered by law to issue currency notes and coins that are used as a

Measuring economies of scale in long run, Economies and Diseconomies of Sca...

Economies and Diseconomies of Scale -Economies of Scale Increase in the output is greater than increase in the inputs. -Diseconomies of Scale Increase in the

Theory, critical of comparative advantage theory

critical of comparative advantage theory

Point elasticity of demand for demand function Q=10-2p, calculate point ela...

calculate point elasticity of demand function Q=10-2p for decrease in price from Rs3 to Rs2

Outline the main components of trade liberalization, Problem: "Mauritiu...

Problem: "Mauritius offers an interesting case study of successful trade liberalization and export-led development in Sub-Saharan Africa. This is a notable achievement given t

Income and Substitution effect for normal goods, Mamun has a weakly income ...

Mamun has a weakly income of 600 dollars. Price of chocolate is 5 dollar and price of potato is taka 10. Both are normal goods. Show the income and substitution effect for each of

Exit strategy, Exit Strategy The exit strategy denotes that which inves...

Exit Strategy The exit strategy denotes that which investors in an organizations realize all or elements of their investment, regardless of the organizations success.

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages