Numerical Question Consider the Rothschild-Stiglitz Model. Assume asymmetric insurance and heterogenous risk types and that all consumers have this utility function: U(I) = 11/3 The frail types have a probability of becoming sick: PFRAIL = 0.15, and the robust types have a probability of becoming sick: PROBUST = 0.05. All individuals start with income of $500. If an individual becomes sick, they lose $400, leaving them with $100. The insurance company decides to offer 2 contracts (A & B) and the consumer can either stick with "no insurance" or decide to buy Contract A or Contract B. The premiums and payouts are as described below: No Insurance Contract A Premium (r) $0 $15 Contract B $18 Payout if sick (q) $0 $380 $400

Numerical Question Consider the Rothschild-Stiglitz Model. Assume asymmetric insurance and heterogenous risk types and that all consumers have this utility function: U(I) = 11/3 The frail types have a probability of becoming sick: PFRAIL = 0.15, and the robust types have a probability of becoming sick: PROBUST = 0.05. All individuals start with income of $500. If an individual becomes sick, they lose $400, leaving them with $100. The insurance company decides to offer 2 contracts (A & B) and the consumer can either stick with "no insurance" or decide to buy Contract A or Contract B. The premiums and payouts are as described below: No Insurance Contract A Premium (r) $0 $15 Contract B $18 Payout if sick (q) $0 $380 $400

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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