= e- where Policyholders are assumed to have a utility function u(x) e > 0 varies between policyholders following an exponential distribution with unknown mean. An insurance company sells an insurance policy which covers a risk which causes a loss of $6,000 with probability 0.4. There are 3,000,000 potential customers for this policy. The insurer finds that when the premium for the policy is set to $3000, they are able to sell 952,000 policies. How many policies would they sell if they increased the premium to $4,000?

= e- where Policyholders are assumed to have a utility function u(x) e > 0 varies between policyholders following an exponential distribution with unknown mean. An insurance company sells an insurance policy which covers a risk which causes a loss of $6,000 with probability 0.4. There are 3,000,000 potential customers for this policy. The insurer finds that when the premium for the policy is set to $3000, they are able to sell 952,000 policies. How many policies would they sell if they increased the premium to $4,000?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he expects a crop of 50,000 bushels. The cost of pesticides is $30,000 and the other costs associated with planting and harvesting the crop total $450,000. The price of corn at harvest time will either be $9.00 with probability of 0.50 or it will be $11.00 with probability 0.50, so if the farmer decides to sell the crop at harvest, the expected price per bushel that he will receive is $10.00. If the farmer decides to sell the crop at harvest, then: a. He should not use pesticides because not using pesticides ensures greater expected profit. b. He should not use pesticides because not using pesticides ensures lower expected profit. c. He should use pesticides because using pesticides ensures greater expected profit. d. He should use pesticides because using pesticides ensures lower expected profit.
Two identically able agents are competing for a promotion. The promotion is awarded on the basis of output (whomever has the highest output, gets the promotion). Because there are only two workers competing for one prize, the losing prize=0 and the winning prize =P. The output for each agent is equal to his or her effort level times a productivity parameter (d). (i.e. Q2=dE1 , Q2=dE2). If the distribution of “relative luck” is uniform, the probability of winning the promotion for agent 1 will be a function of his effort (E1) and the effort level of Agent 2 (E2). The formula is given by...Prob(win)=0.5 + α(E1-E2), where α is a parameter that reflects uncertainty and errors in measurement. High measurement errors are associated with small values of α (think about this: if there are high measurement errors, then the level of an agent’s effort will have a smaller effect on his/her chances of winning). Using this information, please answer the following questions. Both workers have a…
Suppose you have an exponential utility function given by U(x) =1- exp(-x/R) where, for you, R = 1000. Further, suppose you have an investment with a 50/50 chance of returning either 0 or 2000 dollars. Note U(0) = 0 and U(2000) = 0.865, so the utility of the lottery is 0.432. What is the certain equivalent of that investment?
3
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 10%. However, the customer has heard this claim before and believes there is only a 30% chance of actually realizing that cost reduction and a 70% chance of realizing no cost reduction. Assume the customer has an initial total cost of $300. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is . Suppose the sales representative initially offers the accounting system to the customer for a price of $19.50. The information asymmetry stems from the fact that the has more information about the efficacy of the accounting system than does the . At this price, the customer purchase the accounting system, since the expected…
A store manager must hire a clerk to work in her store. The sales of the store are uncertain and also a function of how hard the clerk works. If the clerk works hard (high effort) then there is a 75% chance that sales will be $500 per day and a 25% chance that they will be $100 per day. If the clerk does not work hard (low effort) then there is only a 25% chance that sales will be $500 and a 75% chance that they will be $100. The store manager is risk neutral and her utility is the expected profits of the store i.e.U^Manager = Expected (Sales – Wages). The clerk is risk averse. In addition, the clerk does not like to work hard so exerting high effort lowers her utility. Her utility function is given by U^clerk(w,e)=w^0.5-e where e is either 0 (low effort) or 4 (high effort). Finally, assume that the clerk could work somewhere else where her total utility would be 10. Thus, she will only work in this store if the total utility of working here is at least 10. Below, assume that if the…
Cheryl Druehl Retailers, Inc., must decide whether to build a small or a large facility at a new location in Fairfax. Demand at the location will either be low or high, with probabilities 0.6 and 0.4, respectively. If Cheryl builds a small facility and demand proves to be high, she then has the option of expanding the facility. If a small facility is built and demand proves to be high, and then the retailer expands the facility, the payoff is $230,000. If a small facility is built and demand proves to be high, but Cheryl then decides not to expand the facility, the payoff is $183,000. If a small facility is built and demand proves to be low, then there is no option to expand and the payoff is $250,000. If a large facility is built and demand proves to be low, Cheryl then has the option of stimulating demand through local advertising. If she does not exercise this option, then the payoff is $45,000. If she does exercise the advertising option, then the response to advertising will…
Thelma is indifferent between $100 and a bet with a 0.6 chance of no return and a 0.4 chance of $200. If U(0) = 20 and U(200) = 220, then U(100) = :
Q1) An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets.
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 10%. However, the customer has heard this claim before and believes there is only a 20% chance of actually realizing that cost reduction and a 80% chance of realizing no cost reduction. Assume the customer has an initial total cost of $200. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is $____ . Suppose the sales representative initially offers the accounting system to the customer for a price of $12.00. The information asymmetry stems from the fact that the ______(sales rep or buyer) has less information about the efficacy of the accounting system than does the ______(sales rep or buyer) . At this price, the…
please send handwritten solution for Q3
An individual has a utility function U(W) = VW, where W is the level of wealth. They have been offered a gamble with a payout of £170 with a probability of 0.74 and a payout of £49.7 with a probability of 1-0.74. The Certainty Equivalent of this gamble is: Answer: