An efficient market for risk, such as an insurance market, is MOST likely to exist: a. when the sellers of insurance are risk- averse but the purchasers are not. O b. when there is a level playing field so that all participants have approximately the same wealth and the same degree of risk aversion. c. in the presence of private, or asymmetric, information. d. when there are significant differences between individuals' wealth levels and attitudes toward risk.

An efficient market for risk, such as an insurance market, is MOST likely to exist: a. when the sellers of insurance are risk- averse but the purchasers are not. O b. when there is a level playing field so that all participants have approximately the same wealth and the same degree of risk aversion. c. in the presence of private, or asymmetric, information. d. when there are significant differences between individuals' wealth levels and attitudes toward risk.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His last acquisition is a house worth €1,000, 000. Monty Burns considers purchasing an insurance for this new property. With probability 0.1, he will face damage reducing his property' value to €640,000 while with probability 0.9 his property will not be damaged and thus will remain at its current value. Burns' vNM utility for wealth is given by u°(w) = Vw. Miss b runs an insurance company in Springfield and is willing to insure Monty Burns. The insurance contract says the following: if Burns' new property is damaged, she will pay an amount q (the coverage) to Monty Burns in exchange for a payment r (the premium) that is due independently from the occurence of the damage. Miss b's vNM utility over her income y is u°(y) = y.
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