c) Do you expect the insurance market to fail in this situation? Explain why (or why not)considering the residents' risk aversion. In the town of Springfield, residents work at home and receive $100,000 of income each yearunless their house burns down, in which case they receive $0. Half of the residents aredescended from the Flanders clan and are by nature careful; their probability of fire is 0.2% eachyear. Half of the residents are descended from the Simpson clan and are not as cautious. Theirprobability of fire is 1.0% per year.The residents also have different utility functions. The descendants of Flanders have utility:U,E(X+5)"Where X is their income. The descendants of Simpson are from two lines-half descended fromBart and the other half from Maggie. Bart Simpson's descendants have utility:U =(X+5)"BSWhile Maggie's have utility:U =XMS

This can be defined as a that is related to the decision-making in economics where asymmetric…

Answered: c) Do you expect the insurance market…

c) Do you expect the insurance market to fail in this situation? Explain why (or why not) considering the residents' risk aversion.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

c) Do you expect the insurance market to fail in this situation? Explain why (or why not)
considering the residents' risk aversion.

In the town of Springfield, residents work at home and receive $100,000 of income each year
unless their house burns down, in which case they receive $0. Half of the residents are
descended from the Flanders clan and are by nature careful; their probability of fire is 0.2% each
year. Half of the residents are descended from the Simpson clan and are not as cautious. Their
probability of fire is 1.0% per year.
The residents also have different utility functions. The descendants of Flanders have utility:
U,E(X+5)"
Where X is their income. The descendants of Simpson are from two lines-half descended from
Bart and the other half from Maggie. Bart Simpson's descendants have utility:
U =(X+5)"
BS
While Maggie's have utility:
U =X
MS

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