Cat, who owns the same type of house and faces the same probability distribution of losses as Rainie, also purchases full insurance for an actuarially fair premium from Lemonade Insurance Company. We assume that the two houses are independent of each other. In other words, if one house has a fire, this has no impact on the probability of the other house having a fire. What is the probability distribution of total losses for Lemonade Insurance Company if they sell contracts to both Rainie and Cat? Show your work a. b. What is the expected loss or expected payout for Lemonade Insurance Company if they sell contracts to both Rainie and Cat? What is the amount of risk Lemonade Insurance Company faces if they sell contracts to both Rainie and Cat? Show your work с. Briefly explain the benefit(s) to Lemonade Insurance Company as the number of insurance contracts sold increases? d.

Cat, who owns the same type of house and faces the same probability distribution of losses as Rainie, also purchases full insurance for an actuarially fair premium from Lemonade Insurance Company. We assume that the two houses are independent of each other. In other words, if one house has a fire, this has no impact on the probability of the other house having a fire. What is the probability distribution of total losses for Lemonade Insurance Company if they sell contracts to both Rainie and Cat? Show your work a. b. What is the expected loss or expected payout for Lemonade Insurance Company if they sell contracts to both Rainie and Cat? What is the amount of risk Lemonade Insurance Company faces if they sell contracts to both Rainie and Cat? Show your work с. Briefly explain the benefit(s) to Lemonade Insurance Company as the number of insurance contracts sold increases? d.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.5P

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