Suppose Firm B is selling 1-year insurance contracts for houses. Suppose Firm B's customers are divided into three categories with different probabilities of needing a payment. First category will ask for a payment of 500000 with probability 0.10, the second category will ask for a payment of 250000 with probability 0.15 and the third category will ask for a payment of 100000 with probability 0.2 a. Calculate Firm B's expected payment for the year. Suppose Firm B has 120 customers in the first category, 230 in the second category and 405 in the third category. b. Calculate individual premium if Firm B charges the same amount to all its customers.
Suppose Firm B is selling 1-year insurance contracts for houses. Suppose Firm B's customers are divided into three categories with different probabilities of needing a payment. First category will ask for a payment of 500000 with probability 0.10, the second category will ask for a payment of 250000 with probability 0.15 and the third category will ask for a payment of 100000 with probability 0.2 a. Calculate Firm B's expected payment for the year. Suppose Firm B has 120 customers in the first category, 230 in the second category and 405 in the third category. b. Calculate individual premium if Firm B charges the same amount to all its customers.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
![6- Suppose Firm B is selling 1 -year insurance contracts for houses. Suppose Firm B's
customers are divided into three categories with different probabilities of needing a
payment. First category will ask for a payment of 500000 with probability 0.10, the
second category will ask for a payment of 250000 with probability 0.15 and the third
category will ask for a payment of 100000 with probability 0.2
a. Calculate Firm B's expected payment for the year.
Suppose Firm B has 120 customers in the first category, 230 in the second category
and 405 in the third category.
b. Calculate individual premium if Firm B charges the same amount to all its customers.
1
c. Calculate individual premium if Firm B utilizes the risk groups and charges the same
amount of premium within groups
d. Which group/groups are more likely to buy the insurance with group pricing
compared to the case with uniform pricing?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb0a4ecc2-49f8-4f6c-9d25-8c23b1606382%2F8b21f776-6dd4-4269-9e38-5a32c8edce02%2Fw3bo9l_processed.jpeg&w=3840&q=75)
Transcribed Image Text:6- Suppose Firm B is selling 1 -year insurance contracts for houses. Suppose Firm B's
customers are divided into three categories with different probabilities of needing a
payment. First category will ask for a payment of 500000 with probability 0.10, the
second category will ask for a payment of 250000 with probability 0.15 and the third
category will ask for a payment of 100000 with probability 0.2
a. Calculate Firm B's expected payment for the year.
Suppose Firm B has 120 customers in the first category, 230 in the second category
and 405 in the third category.
b. Calculate individual premium if Firm B charges the same amount to all its customers.
1
c. Calculate individual premium if Firm B utilizes the risk groups and charges the same
amount of premium within groups
d. Which group/groups are more likely to buy the insurance with group pricing
compared to the case with uniform pricing?
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