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

Theory of production, when total production fall what,s the status of avera...

when total production fall what,s the status of average product and marginal product

Optimal consumption bundle and marginal utility per dollar, What is the opt...

What is the optimal consumption bundle and marginal utility per dollar? The optimal consumption bundle is the consumption bundle which maximizes a consumer's total utility sp

Economics of scale, give a detailed discussion on the term economics of sca...

give a detailed discussion on the term economics of scale as applied to economics, highting examples,limitation,and original of economics of scale.

Role of government in a market based economy, 1) What are the most importan...

1) What are the most important challenges that economists try to address? (2) What is the role of government in a market based economy? (3) Who are the main economic players

Calculate quarterly performance metrics , I would tend to think that a 5% p...

I would tend to think that a 5% per year goal is more reasonable. Smaller incremental goals always appear to be more attainable, while more radical goals may actually be more diffi

What is cost push inflation, What is Cost Push Inflation Cost Push Inf...

What is Cost Push Inflation Cost Push Inflation : When a cost of production (e.g. wages) enhances and firms put up prices to maintain profits. Cost increases may occur beca

Indifference curve, Demonstrate mathematically that the equilibrium condit...

Demonstrate mathematically that the equilibrium condition MRS PB PA is the equivalent of the utility-maximizing rule MU AP A MU B PB .

Lending operations of world bank, Lending Operations of World Bank: Re...

Lending Operations of World Bank: Resources of the Bank consist of the capital and borrowings. The capital of the bank is contributed by its 184 member-countries. Besides,

Advantages of division of labour, Advantages of Division of labour: Di...

Advantages of Division of labour: Division of labour has advantages including the following: Development of Greater Skill by the Worker In division of labour, each

What do you mean by costs, Q. What do you mean by Costs? Costs Section ...

Q. What do you mean by Costs? Costs Section 56 of the Environment Act describes costs as including ‘costs to any person and costs to the environment'. The costs of a project a

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages