Economics

posted by .

There are two groups of individuals of equal size, each with a utility
function given by U(M) = sq. root(M), where M = 100 is the initial wealth
level for every individual. Each member of group 1 faces a loss of 36
with probability 0.5. Each member of group 2 faces the same loss with
probability 0.1.

(a) What is the maximum amount of money a member of each group
would be willing to pay to insure against this loss?

(b) Assume that it is impossible to discover which individuals belong
to which group. Will members of group 2 insure against this loss in
a competitive insurance market, where insurance companies o¤er
the same contract to everybody? Explain your answer.

(c) If insurance companies anticipate the result of part (b), what type
of contract will they o¤er in a competitive insurance market?

(d) Now suppose that the insurance companies have an imperfect test
for identifying which individual belongs to which group. If the test
says that a person belongs to a particular group, the probability
that he/she really does belong to that group is p < 1. How large
must p be in order to alter your answer to part (b)?

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. economics

    Suppose a person has a utility function U=YX. What is the minimum level of income required to get a utility of 20?
  2. Economics

    Suppose a firm faces a downward sloping demand curve givven by the equation 1=100-1/3P. The firm's cost function is given by the equation C=30+1/4Q^2. Find the profit maximizing level of output.
  3. Economics

    Socrates owns just one ship. The ship is worth $200 million dollars. If the ship sinks, Socrates loses $200 million. The probability that it will sink is .02. Socrates' total wealth, including the value of the ship is $225 million. …
  4. Economics

    Socrates owns just one ship. The ship is worth $200 million dollars. If the ship sinks, Socrates loses $200 million. The probability that it will sink is .02. Socrates' total wealth, including the value of the ship is $225 million. …
  5. Economics

    3. Peter owns just his car and has £2,500 in cash. The car is worth £7,500. The probability that the car will be stolen (and never recovered) is 0.1. If his vNM utility function is two times the square root of his wealth, what is …
  6. 7th Grade Math

    Linda's teacher divided the class into groups of five and required each member of a group to meet with every other member of that group. How many meetings will each group have?
  7. economics math

    Consider the problem of a rational consumer with an experienced utility function given by 10ln(x)+m and a wealth level W=100. Suppose that the market price for good x is p=$2 per unit. You are asked to analyze the impact on the consumer's …
  8. economics math

    Consider a consumer who has an experienced utility function given by UEU(x,m)=2sqrtx+m. Let q denote the market price of good x, and assume that it remains fixed throughout the problem. The company selling the good x starts an advertisement …
  9. economics

    Consider a consumer who has an experienced utility function given by . Let denote the market price of good , and assume that it remains fixed throughout the problem. The company selling the good starts an advertisement campagin that …
  10. Economics

    Can you check my answer Consider an individual with a utility function of the form: U(x,y)=xy , and where m=1, px=2, and py=3 , where m is the individual's income or wealth, pi is the price of good i. Calculate the individual's optimal …

More Similar Questions