Indicate whether the statement is true or false, and justify your answer.A consumer with declining marginal utility of income will never prefer actuarially fair, partial insurance to actuarially unfair, full insurance.
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Indicate whether the statement is true or false, and justify your answer.
A consumer with declining
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- Suppose a company offers a standard insurance contract with a premium (r) of $2,000 and a payout (q) of $10,000. Suppose that Adelia earns a healthy state income of $70,000, a sick state income of $50,000, and has a 20% chance of becoming ill. For Adelia, this insurance contract would be: A. actuarially fair and partial B. actuarially fair and full C. actuarially unfair and full D. actuarially unfair and partialIndicate whether the statement is true or false, and justify your answer.Risk-averse consumers always prefer insurance that is actuarially fair but not full to full insurance that is actuarially unfair – but the opposite is true for risk-loving consumers.An individual with the utility function given by u(y) = -e-0.5y, and gross disposable income y = 10 faces the probability p 0.3 of getting ill with health care expenditures L = 3. 1. [M] Find optimal insurance coverage if there are no loading factor and full knowledge? 2. [M] Depict this optimal choice. 3. [M] How does it depend on gross income Y?
- Life insurance companies require applicants to submit to a physical examination as proof of insurability prior to issuing standard life insurance policies. In contrast, credit card companies offer their customers a type of insurance called “credit life insurance” that pays off the credit card balance if the cardholder dies. Would you expect insurance premiums to be higher (per dollar of death benefits) on standard life or credit life policies? Explain.Assume a consumer's demand for a medical service is as follows: Q = 100 - Pp where Pp is the out-of-pocket price she actually faces. She is considering four different insurance options: uninsurance, full insurance, a 50% coinsurance plan, and a copayment plan with a $25 copay. Assume this service has a list price of PL = $70. Calculate Q under each insurance plan. Please fill in the final answer without showing the middle steps (a number only, without any extra space, symbol, word, etc.) If the customer is uninsured, Q= • If the customer is fully insured, Q= • If the customer has a 50% coinsurance plan, Q= • If the customer has the copayment plan, Q=Insurance is valuable because a-most individuals are not rational. b-individuals do not know all possible states of the world. c-individuals experience diminishing marginal utility. d-individuals have imperfect information and about the probability of adverse events.
- The lecture mentions that diminishing marginal utility applies to the consumption of money as well as the consumption of certain food. Can you give another example where diminishing marginal utility applies? Can you think of any example where diminishing marginal utility does not apply? From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance? One of the predictions of prospect theory is that we tend to be overly concerned with relatively small risk. Can you think of any example (besides those given in the lecture) that either speaks to this or is an exception?Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?Suppose your preferences can characterized by the simple utility function U = √C, where C is consumption. You enjoy rock climbing, where you have a 10% chance of get- ting injured and losing $50,000. Your income (and therefore consumption) in the uninjured state is $90,000. What is the most you are willing to pay for an insurance policy? What is the fee for a fair insurance?
- The difference between the actuarily fair price for insurance and the price a risk-averse individual is willing to pay to fully insure is called a-insurance benefit b-risk aversion c-the risk premium d-risk profitWhich of the following is NOT an example of on-demand insurance? Which of the following is NOT an example of on-demand insurance? You insure your drones whenever they are taken out of your home environment You purchase an instant travel insurance for the duration of an upcoming trip Your insurance premium fluctuates depending on your driving behavior Your insurance coverage is activated whenever you take on a passenger in your car Item at position 7 7You are the wage earner in a "typical family" with a $58,000 gross annual income. Use the easy method to determine how much insurance you should carry. Answer is complete but not entirely correct. $ Insurance need 580,000 x.