part A B C 1. Assume you have £300,000 worth of assets (W). This includes savings,property and your car. You use the car to drive to school/university everyday and there is a 1 in 20 (or 5 per cent) chance per year that you will beinvolved in an accident that results in the car being a write-off. Assume itsmarket value is £40,000 and remains the same i.e. it does not depreciate.You can take out a full insurance policy for the year that pays out the full£40,000 market value of the car if you have the accident. Assume theinsurance company has many customers with exactly the same assets asyou and who all face the same risk of being involved in a similar accident.a. What is the expected value of taking the gamble i.e. not buying theinsurance policy?b. Assume your utility function is W0.25 What is your expected utilityfrom taking the gamble?c. Calculate the certainty equivalent and risk premium of the gamble.d. What is the maximum amount you would be willing to pay for theinsurance policy out of your £300,000 worth of assets?e. What is the break-even/actuarially fair insurance premium in thiscase?f. Draw a diagram to illustrate your answers to the previousquestions. g. Assume the administration costs for the insurance company are£10 per customer. Explain how mutually beneficial trade is possibleover a range of prices. Calculate the individual consumer andproducer surplus at one particular price.Assume now that there are two types of driver. One half of them arevery skilful drivers and each of these has only a 2 per cent chanceper year of being involved in a car accident while the other half areless able/careful drivers who each have a 8 per cent chance per yearof being involved in an accident.h. Assume there is perfect information in the market. Calculate aninsurance premium for both the very skilful and less careful driversthat would enable mutually beneficial trade with the insurancecompany. Assume the administrative costs are still £10 per policyfor both types of customer.i. Assume now that there is asymmetric information in the market.When a customer purchases a policy, the insurance company doesnot know if they are skilful or less able drivers. What is the break-even/actuarially fair insurance premium if the insurance companyassumes that 50 per cent of its customers are the skilful driversand 50 per cent are the less able drivers? Assuming theadministration costs are still £10 per customers, what premiummight the insurance company charge on this basis?j. Using your answers to parts h. and i, predict what you think willhappen in the market at the premium you suggested in theprevious answer. Explain how this illustrates the process ofadverse selection. Calculate any lost surplus per customer.

Asset (W) = $300,000 Probability of accident of the car = 5% or 0.05 Market value of car = $40,000

1. Assume you have £300,000 worth of assets (W). This includes savings, property and your car. You use the car to drive to school/university every day and there is a 1 in 20 (or 5 per cent) chance per year that you will be involved in an accident that results in the car being a write-off. Assume its market value is £40,000 and remains the same i.e. it does not depreciate. You can take out a full insurance policy for the year that pays out the full £40,000 market value of the car if you have the accident. Assume the insurance company has many customers with exactly the same assets as you and who all face the same risk of being involved in a similar accident. a. What is the expected value of taking the gamble i.e. not buying the insurance policy? b. Assume your utility function is W0.25, What is your expected utility from taking the gamble? c. Calculate the certainty equivalent and risk premium of the gamble.

1. Assume you have £300,000 worth of assets (W). This includes savings, property and your car. You use the car to drive to school/university every day and there is a 1 in 20 (or 5 per cent) chance per year that you will be involved in an accident that results in the car being a write-off. Assume its market value is £40,000 and remains the same i.e. it does not depreciate. You can take out a full insurance policy for the year that pays out the full £40,000 market value of the car if you have the accident. Assume the insurance company has many customers with exactly the same assets as you and who all face the same risk of being involved in a similar accident. a. What is the expected value of taking the gamble i.e. not buying the insurance policy? b. Assume your utility function is W0.25, What is your expected utility from taking the gamble? c. Calculate the certainty equivalent and risk premium of the gamble.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: How do we calculate the sponsor's costs?

A: Sponsorship cost refers to the cost of supporting an event or economic activity for an agent in…

Q: There is an economic impact to losing a customer. Describe 4 ways it can impact a company and if…

A: An person or corporation that purchases products or services from another firm is known as a…

Q: What do the ethical implications that may arise when profits are the only focus of a business? Can…

A: Ethics basically refers to the morals that the business should follow while working. These are…

Q: Carson used $800 000 of their savings to open a coffee shop. The savings account paid 2% interest.…

A: We know that the economic profit is the difference between the total sales revenue of output and the…

Q: How are the annual revenues and expenses estimated?

A: The annual revenue can be estimated by multiply the units of goods and services sold to the price…

Q: Engineers are called upon to participate in a variety of decision-making processes. What are they?

A: Decision making is a cognitive process of choosing a course of action, a tangible item for…

Q: Explain the main structure of a proposal and discuss what kinds of content should be included. What…

A: A proposal is a written document that outlines a plan or an idea and seeks approval, funding, or…

Q: ne policyholder's car was damaged after a massive hail storm came througl pairs due to the hail…

A: Insurance is a contract represented by an insurance contract in which an individual as an entity…

Q: Interest Rate iA 0 Ms Quantity of Money MD (Y, P)

A: (a) Calculating M1 and M2M1: This includes the most liquid forms of money:Currency: $95Checkable…

Q: I did upload one question at a time but I kept getting a regetted and had no choice. Thank you for…

A: When making daily decisions, both people and small businesses can more accurately assess market…

Q: When is it necessary to use factorial design

A: A class of experimental designs which are economical is known as factorial design.That is with the…

Q: d C b a U 0 30 50 75 W 100

A: Step 1:I would rather win a gift card so I can get whatever I want; it would depend on the gift…

Q: Q 1 2 3 4 5 6 7 8 9 10 FC $16 $16 $16 $16 $16 $16 $16 VC ATC $20 $36.00 $27.00 $38 $54 $23.33 $68…

A: In the long run, the market price equals the minimum average total cost (ATC) of producing any…

Q: How is the Purchasing power important?

A: Answer - Purchasing Power - Purchasing power is overall buying capacity of country which is…

Q: What is the time value of money?

A: Time value of money (TVM) is a concept that emphasizes on the opportunity cost of money, and…

Q: what are types of saving vehicles

A: Savings is the money left over after subtracting a person's consumption expenses from their…

Q: need d. aswell

A: Labour productivity is calculated as production per labour hour. Labour productivity is mostly…

Q: Executive Letter of one page about the Engineering Financial Economic

A: An Executive Letter is a formal written communication in a business. It is a type of correspondence…

Q: It is the amount of money paid for the use of borrowed capital. Future Worth Interest Principal…

A: Capital is often defined as the cash or any kind of asset which can be used to make expenditures.…

Question

part A B C

1. Assume you have £300,000 worth of assets (W). This includes savings,
property and your car. You use the car to drive to school/university every
day and there is a 1 in 20 (or 5 per cent) chance per year that you will be
involved in an accident that results in the car being a write-off. Assume its
market value is £40,000 and remains the same i.e. it does not depreciate.
You can take out a full insurance policy for the year that pays out the full
£40,000 market value of the car if you have the accident. Assume the
insurance company has many customers with exactly the same assets as
you and who all face the same risk of being involved in a similar accident.
a. What is the expected value of taking the gamble i.e. not buying the
insurance policy?
b. Assume your utility function is W0.25 What is your expected utility
from taking the gamble?
c. Calculate the certainty equivalent and risk premium of the gamble.
d. What is the maximum amount you would be willing to pay for the
insurance policy out of your £300,000 worth of assets?
e. What is the break-even/actuarially fair insurance premium in this
case?
f. Draw a diagram to illustrate your answers to the previous
questions.

g. Assume the administration costs for the insurance company are
£10 per customer. Explain how mutually beneficial trade is possible
over a range of prices. Calculate the individual consumer and
producer surplus at one particular price.
Assume now that there are two types of driver. One half of them are
very skilful drivers and each of these has only a 2 per cent chance
per year of being involved in a car accident while the other half are
less able/careful drivers who each have a 8 per cent chance per year
of being involved in an accident.
h. Assume there is perfect information in the market. Calculate an
insurance premium for both the very skilful and less careful drivers
that would enable mutually beneficial trade with the insurance
company. Assume the administrative costs are still £10 per policy
for both types of customer.
i. Assume now that there is asymmetric information in the market.
When a customer purchases a policy, the insurance company does
not know if they are skilful or less able drivers. What is the break-
even/actuarially fair insurance premium if the insurance company
assumes that 50 per cent of its customers are the skilful drivers
and 50 per cent are the less able drivers? Assuming the
administration costs are still £10 per customers, what premium
might the insurance company charge on this basis?
j. Using your answers to parts h. and i, predict what you think will
happen in the market at the premium you suggested in the
previous answer. Explain how this illustrates the process of
adverse selection. Calculate any lost surplus per customer.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Given

Part a

Part b

Part c

Part c (Contd.)

Trending now

This is a popular solution!

Step by step

Solved in 5 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Pick 1 current economic topic below and You will research and find an article that covers the topic you have chosen. You can use an article online or offline from any reputable source. You will write up a review of the article and integrate course concepts into your review. Please make sure you summarize the article. Complete this essay in a Microsoft Word document in APA format and Works Cited page. Please note that a minimum of 700 words for the essay is required. Business costs: · Implicit and explicit costs · Accounting profits · Economic profits · Productivity · Total costs · Marginal costs · …
In a mortgage/trust deed form of loan the terms of payment and interest rate would be found on the A.Deed B.Loan application C.Promissory note
Typed and correct answer please. I ll rate
How to aduittor detect kiting
Funding details provided Satisfactory Fair Unsatisfactory explain and give a rubric.50 words
How would present a loss and or an expense or damage claim?
Could you answer parts D-F please?
breakeven point explained
Ans for part D
Need help with part d & e
High quality information gruarantees that every decisions made will be a successful one that benefits the organization
If a consumer's Engle curve for a certain product is downward sloping then (a) the product must be a normal good. (b) the product must be an inferior good. (c) the product must be a bad. (d) the product must be a neuter. +