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Moral Hasard and Insurance The utility is U = W1/2 − 350S + 95S1/2 ; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 − S1/2 Wealth is ✩850,000 without accident and ✩300,000 with accident.

Moral Hasard and Insurance The utility is U = W1/2 − 350S + 95S1/2 ; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 − S1/2 Wealth is ✩850,000 without accident and ✩300,000 with accident.

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
Section: Chapter Questions
Problem 11RQ: What is an actuarially fair insurance policy?
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Moral Hasard and Insurance

The utility is U = W1/2 − 350S + 95S1/2 ; where W is wealth and S is care taken to avoid

accidents.

Probability of accident is 0.70 − S1/2

Wealth is ✩850,000 without accident and ✩300,000 with accident.

  1. Calculate S, EU and CE without insurance.
  2. Calculate S and EU with full insurance
Moral Hasard and Insurance The utility is U = W\/2 – 350S + 95S/2; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 – S'/2 Wealth is $850,000 without accident and $300,000 with accident. a. Calculate S, EU and CE without insurance. b. Calculate S and EU with full insurance.
Transcribed Image Text:Moral Hasard and Insurance The utility is U = W\/2 – 350S + 95S/2; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 – S'/2 Wealth is $850,000 without accident and $300,000 with accident. a. Calculate S, EU and CE without insurance. b. Calculate S and EU with full insurance.
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