Discuss the differntaition between Neccesity and Luxury expendses in life. Why Islam discourage luxury life style? Discuss the role of Insurance in managing your investment risks.
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Discuss the differntaition between Neccesity and Luxury expendses in life. Why Islam discourage luxury life style?
Discuss the role of Insurance in managing your investment risks.
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- The ability of insurance to spread risk is limited bya. risk aversion and moral hazard.b. risk aversion and adverse selection.c. moral hazard and adverse selection.d. risk aversion onlyOf the methods for covering risk, which is essentially a dollar for dollar shift of consumption between periods? A. Savings B. Private Market Insurance C. Social Insurance D. CharityWhen you choose to buy insurance, are you speculating? When you choose not to buy insurance, are you also speculating? Explain.
- Portray a utility function for money that “explains” why a person might buy a lottery ticket (and therefore appears risk acceptant) and also pur- chase a homeowner’s insurance policy (appearing risk averse).Questions 4 & 5 Michelle owns a house in which she keeps valuables worth 100,000 which can get stolen with probability 1%. She can purchase coverage C of the amount C ∈ [0; 100,000] at premium π = 0.05 dollars for each dollar covered. Her Bernouilli utility function is u(w) = ln(w). Assume she has no other assets. 1. Set up her maximization problem. 2. How much insurance will she choose to buy? 3. How much profits does the insurance company earn on insuring Michelle? 4. Does the fact that the insurance company earn profits mean that Michelle is worse off com-pared to the situation in which she is not insured? Explain what is happening. 5. How much insurance will she buy if insurance companies charge an actuarially fair insurance rate?2. Consider an individual with a current wealth of $100,000 who faces the prospect of a 25% chance of losing $20,000 through theft of her car during the next year. If the person’s utility function is U(X) = ln(X), where X is wealth: a. calculate expected utility without insurance, b. calculate the actuarially fair premium for full insurance, c. calculate expected utility with full insurance at the actuarially fair premium d. calculate the maximum amount the individual would pay for full insurance.
- You want to buy a life insurance so that your family will receive $25,000 per year in interest. The interest rate expected from banks is 11%, while inflaation rate is expected to be 4% per year. a. What is the effective interest rate? (7.5%, 6.73%, 3.6%, or 2.75%) b. How much insurance should you buy? ($333,333, $694,444, $371,471, or $909,090) provide complete solution pleaseInvestors have different preferences with regards to the risk: they can be risk averse, risk neutral and risk seeking. What do we mean by risk averse, risk neutral, and risk seeking?Describe the risk-adjusted discount-rate approach?
- A. From the graph below explain how an insurance plan which provides the buyer a $15,000 wealth level, regardless of any uncertain event, is a good deal for the buyer? In other words, what does the distance between points D’ and C’ represent? Note we are referring to D prime, not D. B. Considering the graph below, can you explain the difference between expected utility and certainty utility?What term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk managementExplain the different between takaful and insurance.
