Now suppose Ben owns a $600,000 house and has an 8% chance of experiencing a fire in any given year. Assume as before that the fire will result in a total loss. Suppose the Lemonade Insurance Company offers Rainie and Ben the same insurance contract and charges them the same premium. In other words, they put Rainie and Ben into the same risk pool. તે. What is the probability distribution of total losses for Lemonade Insurance Company if they sell contracts to Rainie and Ben? b. What premium must Lemonade Insurance Company charge each of Rainie and Ben if they want to 'break even'? C. Will Rainie purchase this contract if she is charged the 'break-even' premium? Will Ben purchase this contact if he is charged the 'break-even' premium? Briefly explain your reason. d. What is the amount of risk Lemonade Insurance Company faces if they sell contracts to both Rainie and Ben?
Now suppose Ben owns a $600,000 house and has an 8% chance of experiencing a fire in any given year. Assume as before that the fire will result in a total loss. Suppose the Lemonade Insurance Company offers Rainie and Ben the same insurance contract and charges them the same premium. In other words, they put Rainie and Ben into the same risk pool. તે. What is the probability distribution of total losses for Lemonade Insurance Company if they sell contracts to Rainie and Ben? b. What premium must Lemonade Insurance Company charge each of Rainie and Ben if they want to 'break even'? C. Will Rainie purchase this contract if she is charged the 'break-even' premium? Will Ben purchase this contact if he is charged the 'break-even' premium? Briefly explain your reason. d. What is the amount of risk Lemonade Insurance Company faces if they sell contracts to both Rainie and Ben?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Answer part d
Transcribed Image Text:3.
Now suppose Ben owns a $600,000 house and has an 8% chance of experiencing a fire in
any given year. Assume as before that the fire will result in a total loss. Suppose the
Lemonade Insurance Company offers Rainie and Ben the same insurance contract and
charges them the same premium. In other words, they put Rainie and Ben into the same
risk pool.
a.
What is the probability distribution of total losses for Lemonade Insurance
Company if they sell contracts to Rainie and Ben?
b.
What premium must Lemonade Insurance Company charge each of Rainie and
Ben if they want to 'break even'?
C.
Will Rainie purchase this contract if she is charged the 'break-even' premium? Will
Ben purchase this contact if he is charged the 'break-even' premium? Briefly
explain your reason.
d.
What is the amount of risk Lemonade Insurance Company faces if they sell
contracts to both Rainie and Ben?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education