Q3 Competitive insurance model with symmetric information: True or False Answer the following True/False questions about the model of competitive insurance with symmetric information. Searching for policy server. Q3.1 In the symmetric information equilibrium, both types of insurance customer get polices that provide perfect insurance. O True

Q3 Competitive insurance model with symmetric information: True or False Answer the following True/False questions about the model of competitive insurance with symmetric information. Searching for policy server. Q3.1 In the symmetric information equilibrium, both types of insurance customer get polices that provide perfect insurance. O True

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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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.
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?
18.5 Suppose there is a 50–50 chance that an individual with log- arithmic utility from wealth and with a current wealth of $20,000 will suffer a loss of $10,000 from a car accident. Insur- ance is competitively provided at actuarially fair rates. Compute the outcome if the individual buys full insurance. Compute the outcome if the individual buys only partial insurance covering half the loss. Show that the outcome in part (a) is preferred. Now suppose that individuals who buy the partial rather than the full insurance policy take more care when driv- ing, reducing the damage from loss from $10,000 to $7,000. What would be the actuarially fair price of the partial policy? Does the individual now prefer the full or the partial policy?
A9 Describe an example of adverse selection that we may run into in the real world. How does adverse selection impact the policy holders for this specific type of insurance for: High risk participants? Low risk participants? What is one government regulation that has been enacted in the last 20 years that helps either high risk or low risk policy holders in the United States
5 2.Asymmetric Information. Now let’s examine the impact of asymmetric information on thecreditmarket equilibrium. Specifically, in this question we assume that Anderson is not able toobserveor enforce the project that the borrower chooses. As a result, the loan contract can onlyspecifythe interest rate (not the project). Everything else remains as in problem 1.a.What type of asymmetric information problem does Anderson face? Write a shortexplanation justifying your answer.
Breifly discuss the factors that determine demand for an insurance policy and how they different then normal determinant demand of a commodity?
Amy's utility depends upon her income, w. Her utility function is √w. She receives a prize that depends on the roll of a dice. If she rolls a 3 or 4 or 6, she will receive $400. Otherwise, if she rolls a 1 or 2 or 5, she will receive $100.4. A competitive market offers insurance at a fair premium against the risk of rolling a 1, 2 or 5. What is the utility of Amy if she buys insurance (round at the second decimal)?5. How much money beyond the fair premium is Amy willing to pay to get rid of risk entirely?
(a)Explain what is meant by "asymmetric information." Identify and explain the twobasic types of problems that arise when there is asymmetric information.
Which of he following stalements about lhe Time Limil on Certain Defenses provision in an Accident and Heallh policy is CORRECT? A.It specifies the period of time after which an insurance company can deny a claim on he basis of the claim having pre-existed before the effective dale of coverage. B.It specifies the period of lime during which the insured must submit Proof of Loss. C.It prohibits legal actions against the insurance company after a specified period of time. D.It prevents an insurance company from maki any changes to a policy after il is issued.
**Practice** suppose that many insurance companies sell contracts of the following format:- The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value. - If the cell phone is stolen, they get the value of the phone back (that is, Anne would get$700 from the insurance company if her phone were stolen, and Bob would get $600) Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. What is the actuarially fair premium and who buys the full insurance plan?a. The actuarially fair premium is 260 and only Bob buys itb. The actuarially fair premium is 130 and both Anne and Bob buy itc.The actuarially fair premium is 180 and both…
**Practice** suppose that many insurance companies sell contracts of the following format: - The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value.- If the cell phone is stolen, they get the value of the phone back (that is, Anne would get $700 from the insurance company if her phone were stolen, and Bob would get $600) Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. Continue assuming that the insurance companies are risk-neutral and competitive, but now instead of assuming that the risks are correlated instead of independent. Specifically, suppose that with probability 0.2, a bandit group raids the city and…
You are in the market for a used car. At a used carlot, you know that the Blue Book value of the car youare looking at is between $15,000 and $19,000. Ifyou believe the dealer knows as much about the caras you do, how much are you willing to pay? Why?Assume that you care only about the expected valueof the car you will buy and that the car values aresymmetrically distributed.23. Refer to Problem 22. Now you believe the dealerknows more about the car than you do. How muchare you willing to pay? Why? How can this asymmetric information problem be resolved in a competitivemarket?