Buyers' willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined below. High-Risk 10,000 Low-Risk WTP ($) WTA ($) 6,000 8,000 2,000 (a) In a world with perfect information, would the market for insurance plans clear? If not, why? If yes, what are some prices that would allow both markets to clear? The prices in each market are allowed to differ. (b) Assume now that there is asymmetric information and that insurance companies do not know how risky an individual buver is In the face of this uncertainty they determine that the

Buyers' willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined below. High-Risk 10,000 Low-Risk WTP ($) WTA ($) 6,000 8,000 2,000 (a) In a world with perfect information, would the market for insurance plans clear? If not, why? If yes, what are some prices that would allow both markets to clear? The prices in each market are allowed to differ. (b) Assume now that there is asymmetric information and that insurance companies do not know how risky an individual buver is In the face of this uncertainty they determine that the

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.6IP

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Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 If an insurance company knows the probability of Tess experiencing an adverse event, what is the actuarially fair premium charged to Tess per $1 of benefit? Round to two decimal places
Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function ( sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 Calculate Lex’s and Tess' expected utilities without insurance. (each one separated) Round to two decimal places for both
Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 Suppose that insurance companies do not know specific probabilities of adverse events for Tess or Lex, but do know the average probability of an adverse event. If they assumed that both Tess and Lex purchase full insurance, what is the actuarially fair premium charged? Round to two decimal places
What is the true cost of going to the doctor? Question 7 options: The amount you pay minus the amount your insurance covers (i.e. the amount you pay out of pocket) The amount you pay There is no cost if your insurance is good enough. The amount you pay out of pocket, plus the worth of the time you lose while waiting, plus the travel cost, plus the increased risk of being infected with Covid-19 while at the doctor's office
5. Individual Problems 18-5 When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, the auctioneer actively woos representatives of other museums that have no chance of winning to attend anyway. Suppose a piece of art has recently become available for sale and will be auctioned off to the highest bidder, with the winner paying an amount equal to the second highest bid. Assume that most collectors know that Simone places a value of $65,000 on the art piece and that she values this art piece more than any other collector. Suppose that if no one else shows up, Simone simply bids $65,0002=$32,500$65,0002=$32,500 and wins the piece of art. The expected price paid by Simone, with no other bidders present, is . Suppose the owner of the artwork manages to recruit another bidder, Yakov, to the auction. Yakov is known to value the art piece at $52,000. The expected price paid by Simone, given the…
Explain:1. Risk analysis allows assessment of future uncertain impacts, and incorporates uncertainty into the assessment. 2. Risk analysis provides a method for comparing low-probability, high consequence impacts with high-probability, low-consequence impacts.
BPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each form. Form Type Mix of Forms Form Cost A 0.5 $3.00 B 0.5 $1.00 The expected cost of digitizing a form is . Suppose the client and BPO agree to a deal, whereby the client pays BPO to digitize forms. The price of each form processed is equal to the expected cost of the form that you calculated in the previous part of the problem. Suppose that after the agreement, the client sends only forms of type A. The expected digitization cost per form of the forms sent by the client is . This leads to an expected loss of per form for BPO. (Hint: Do not round your answers. Enter the loss as a positive number.)
For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a) A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent chance of receiving $100 to receiving $190 for sure.b) A shareholder prefers receiving $775 with certainty to a 75 percent chance of receiving $1,000 and a 25 percent chance of receiving $100.c) A consumer is indifferent between receiving $550 for sure and a lottery that pays $1,000 half of the time and $100 half of the time.
Suppose in a given state's new insurance marketplace, with community rating and no restrictions on who can buy at the community rate, the risk pool (distribution of expected health costs) is as follows: 30% of eligible enrollees' expected health costs = $1,000 (per year)65% of eligible enrollees' expected health costs = $2,0005% of eligible enrollees' expected health costs = $10,000 Now suppose one insurer, and one insurer only, were allowed to offer any premium it wanted to any potential buyer and to exclude those it did not want to cover? What premium would they likely charge and who would they sell to and who would they exclude? What would happen to the other insurers? Does this help you see why the ACA was written to apply to all insurers?
For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving. a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of receiving $500 to receiving $680 for sure. b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of receiving $1,100 and a 20 percent chance of receiving $200. c. A consumer is indifferent between receiving $1,360 for sure and a lottery that pays $2,000 with a 60 percent probability and $400 with a 40 percent probability.
A clothing store and a jeweler are located side by side in a shopping mall. If the clothing store spend C dollars on advertising and the jeweler spends J dollars on advertising, then the profits of the clothing store will be (36 + J )C - 2C 2 and the profits of the jeweler will be (30 + C )J - 2J 2. The clothing store gets to choose its amount of advertising first, knowing that the jeweler will find out how much the clothing store advertised before deciding how much to spend. The amount spent by the clothing store will be Group of answer choices $17. $34. $51. $8.50. $25.50.
The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neutral, not risk averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.