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a) Suppose that you have a job paying $50,000 per year. With a 15% probability, next year your wage will be reduced to $20,000 for the year. 1. What is your expected income next year? 11. Suppose that you could insure yourself against the risk of reduced consumption next year. What would the actuarially fair insurance premium be?

a) Suppose that you have a job paying $50,000 per year. With a 15% probability, next year your wage will be reduced to $20,000 for the year. 1. What is your expected income next year? 11. Suppose that you could insure yourself against the risk of reduced consumption next year. What would the actuarially fair insurance premium be?

MATLAB: An Introduction with Applications
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
Problem 1P
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a) Suppose that you have a job paying $50,000 per year. With a 15% probability, next year your wage will be reduced to $20,000 for the year. 1. What is your expected income next year? 11. Suppose that you could insure yourself against the risk of reduced consumption next year. What would the actuarially fair insurance premium be? b) It has been observed that the consumption expenditure of people drops when they begin their retirement life. This implies that their consumption is not smooth, and proves that they are not fully insured against leaving the workforce. Is this statement true? Explain. c) A water company owns water pipes that burst often due to poor maintenance. The company can invest GHS m in the maintenance of the pipes. More maintenance means less water loss through bursts, and less compensation payments to residents due to 1 flooding of their properties. Assume that the value of lost water is maintenance reduces the amount of loss. Assume that the value of damage to properties m so that more 3 so that more maintenance decreases the amount of where the pipes are routed is m damage to properties. 1. What is the socially optimal level of maintenance, m? What is the associated value of lost water and property damage? (Note: Minimize the total cost function) 11. What level of m is chosen when pipes that burst run though land owned by government (the company pays nothing for damages even though there is still some damage associated with pipe bursts)? What is the new value for property damage? What is the deadweight loss?
Transcribed Image Text:a) Suppose that you have a job paying $50,000 per year. With a 15% probability, next year your wage will be reduced to $20,000 for the year. 1. What is your expected income next year? 11. Suppose that you could insure yourself against the risk of reduced consumption next year. What would the actuarially fair insurance premium be? b) It has been observed that the consumption expenditure of people drops when they begin their retirement life. This implies that their consumption is not smooth, and proves that they are not fully insured against leaving the workforce. Is this statement true? Explain. c) A water company owns water pipes that burst often due to poor maintenance. The company can invest GHS m in the maintenance of the pipes. More maintenance means less water loss through bursts, and less compensation payments to residents due to 1 flooding of their properties. Assume that the value of lost water is maintenance reduces the amount of loss. Assume that the value of damage to properties m so that more 3 so that more maintenance decreases the amount of where the pipes are routed is m damage to properties. 1. What is the socially optimal level of maintenance, m? What is the associated value of lost water and property damage? (Note: Minimize the total cost function) 11. What level of m is chosen when pipes that burst run though land owned by government (the company pays nothing for damages even though there is still some damage associated with pipe bursts)? What is the new value for property damage? What is the deadweight loss?
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