**Practice** suppose that many insurance companies sell contracts of the following format: - The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value.- If the cell phone is stolen, they get the value of the phone back (that is, Anne would get $700 from the insurance company if her phone were stolen, and Bob would get $600) Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. Continue assuming that the insurance companies are risk-neutral and competitive, but now instead of assuming that the risks are correlated instead of independent. Specifically, suppose that with probability 0.2, a bandit group raids the city and steals all the phones in the market, and with probability 0.8 no phones are stolen. Does that change in assumptions mean that the answer to the previous question would be different?A. Yes, the answer would surely be different.B. We do not have enough information to know.C. No, the answer would be the same.D. (Not used in this question)E. (Not used in this question) _______PREVIOUS QUESTION )____________ Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. What is the actuarially fair premium and who buys the full insurance plan?A. The actuarially fair premium is 260 and only Bob buys itB. The actuarially fair premium is 130 and both Anne and Bob buy itC. The actuarially fair premium is 180 and both Anne and Bob buy itD. The actuarially fair premium is 110 and only Anne buys itE. None of the options above
**Practice**
suppose that many insurance companies sell contracts of the following format:
- The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value.
- If the cell phone is stolen, they get the value of the phone back (that is, Anne would get $700 from the insurance company if her phone were stolen, and Bob would get $600)
Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob.
Continue assuming that the insurance companies are risk-neutral and competitive, but now instead of assuming that the risks are correlated instead of independent. Specifically, suppose that with probability 0.2, a bandit group raids the city and steals all the phones in the market, and with probability 0.8 no phones are stolen. Does that change in assumptions mean that the answer to the previous question would be different?
A. Yes, the answer would surely be different.
B. We do not have enough information to know.
C. No, the answer would be the same.
D. (Not used in this question)
E. (Not used in this question)
_______PREVIOUS QUESTION )____________
Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob.
What is the actuarially fair premium and who buys the full insurance plan?
A. The actuarially fair premium is 260 and only Bob buys it
B. The actuarially fair premium is 130 and both Anne and Bob buy it
C. The actuarially fair premium is 180 and both Anne and Bob buy it
D. The actuarially fair premium is 110 and only Anne buys it
E. None of the options above
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