Economics2. Suppose that a farmer usually makes profit of$120,000 per year. Let's say that there is a 2%chance that a tornado will hit the farm. This wouldstrongly hurt farmer's profit, leading to losses of$96,000 with 2% probability.a. What is the actuarially fair insurance?b. Assume that the farmer utility is given by u = 70.5 where 7t represents profit. What is the farmer'sexpected utility with no insurance?c. How much would the farmer be willing to pay tohave insurance?d. Assume that the farmer expects that thetornado's effect to your farm is lower, only leadingto losses of $70,000.i. What is the actuarially fair insurance?ii. What is the farmer's expected utility with noinsurance?iii. How much would the farmer be willing to payto have insurance?iv. What is the risk premium?

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2. Suppose that a farmer usually makes profit of $120,000 per year. Let's say that there is a 2% chance that a tornado will hit the farm. This would strongly hurt farmer's profit, leading to losses of $96,000 with 2% probability. a. What is the actuarially fair insurance?

2. Suppose that a farmer usually makes profit of $120,000 per year. Let's say that there is a 2% chance that a tornado will hit the farm. This would strongly hurt farmer's profit, leading to losses of $96,000 with 2% probability. a. What is the actuarially fair insurance?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter16: Information, Risk, And Insurance

Section: Chapter Questions

Problem 10RQ: In an insurance system, would you expect each person to receive in benefits pretty much what they...

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