Elena applies for private insurance and resents the number of questions asked on the application. She states that since the primary contribution of insurance companies is to pool the risk of many individuals, they should care less about the characteristics of any one applicant and more about increasing the number of the patients that they insure. Furthermore, she states, when she had insurance through her employer, she hardly had to answer any questions. Use economic reasoning to explain to Elena the insurance company's behavior

Elena applies for private insurance and resents the number of questions asked on the application. She states that since the primary contribution of insurance companies is to pool the risk of many individuals, they should care less about the characteristics of any one applicant and more about increasing the number of the patients that they insure. Furthermore, she states, when she had insurance through her employer, she hardly had to answer any questions. Use economic reasoning to explain to Elena the insurance company's behavior

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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Victoria founded a start-up several years ago, together with her Macedonian friends. At first, she was fairly poor and therefore very afraid of taking risks. Any negative shock could send the company into bankruptcy. Nowadays her business is thriving, stretching across several markets from Europe to Asia. Victoria no longer worries about taking monetary risks. In fact she enjoys a good gamble over horse races from time to time. How would you draw Victoria's utility function in a way that describes her changing taste for risk as her wealth increased? Please draw a graph and comment. Please do fast ASAP fast
We learned that we can use choice between a gamble over someone's best and worst outcomes and getting an outcome of interest (like getting pizza) for certain as a way to assign numeric values to utility (on a scale of 0 to 1). Using this method, if you are indifferent between the following: A gamble that has a 0.3 chance of your best possible outcome (and no lower chance), and a 0.7 chance of your worst possible outcome. Getting pizza for certain. it means that your utility for getting pizza is:
Question 9 Which of the following is true in the principal agent model?1. The agent has more information and may shirk by behaving in a way contrary to the principal's interest. 2. The principal has less information and may shirk by behaving in a way contrary to the agent's interest. 3.The principal has more information and may shirk by behaving in a way contrary to the agent's interest. 4.The agent has less information and may shirk by behaving in a way contrary to the principal's interest.
Draw a utility function over income u( I) that describes a man who is a risk lover when his income is low but risk averse when his income is high. Can you explain why such a utility function might reasonably describe a person’s preferences?
What is loss aversion? Explain how the topic is related to behavioral economics? Give at least two examples.
Jacob is considering buying hurricane insurance. Currently, without insurance, he has a wealth of $80,000. A hurricane ripping through his home will reduce his wealth by $60,000. The chance of this happening is 1%. An insurance company will offer to compensate Jacob for 80% of the damage that any tornado imposes, provided he pays a premium. Jacob’s utility function for wealth is given by U(w) = In (w). (A) What is the maximum amount Jacob is willing to pay for this insurance? Show work and explain.
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Multiple Choice Adverse selection describes a situation where an individual's demand for insurance is positively correlated with the individual's risk of loss. Adverse selection occurs when someone increases their exposure to risk when insured. This can happen, for example, when a person takes more risks because someone else bears the cost of those risks. The relationship between smoking status and mortality provides a good illustration for adverse selection, especially in the case in which a life insurance company did not vary its premiums according to smoking status of its customers. To counter the effects of adverse selection, insurers may offer premiums that are proportional to a customer's risk.
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
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In the mid-1990s, the state of New Jersey revised its rules for the individual insurance market and began requiring that insurers charge the same premiums for the same coverage to all applicants. Assuming that insurers had previously used medical underwriting, which of the following is a predictable consequence of adverse selection? 1) Insurance becomes less attractive to the healthiest individuals, so fewer of them buy it 2) Insurers’ average costs of providing coverage increase because of a changing risk pool 3) The average age of those buying in the individual market goes up 4) All of the above
Consider the St. Petersburg Paradox problem first discussed by Daniel Bernoulli in 1738. The game consists of tossing a coin. The player gets a payoff of 2^n where n is the number of times the coin is tossed to get the first head. So, if the sequence of tosses yields TTTH, you get a payoff of 2^4 this payoff occurs with probability (1/2^4). Compute the expected value of playing this game. Next, assume that utility U is a function of wealth X given by U = X.5 and that X = $1,000,000. In this part of the question, assume that the game ends if the first head has not occurred after 40 tosses of the coin. In that case, the payoff is 240 and the game is over. What is the expected payout of this game? Finally, what is the most you would pay to play the game if you require that your expected utility after playing the game must be equal to your utility before playing the game? Use the Goal Seek function (found in Data, What-If Analysis) in Excel.