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=(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 a) Write down each type's expected utility in a world with no insurance. b) The town's sole insurer, Burns Insurance Co., cannot distinguish between the residents. If it offers actuarially-fair insurance based on the town's average rate of fires, what will be the premium? Who will buy insurance?

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=(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 a) Write down each type's expected utility in a world with no insurance. b) The town's sole insurer, Burns Insurance Co., cannot distinguish between the residents. If it offers actuarially-fair insurance based on the town's average rate of fires, what will be the premium? Who will buy insurance?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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