Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 If an insurance company knows the probability of Tess experiencing an adverse event, what is the actuarially fair premium charged to Tess per $1 of benefit
Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. Refer to Scenario 2 If an insurance company knows the probability of Tess experiencing an adverse event, what is the actuarially fair premium charged to Tess per $1 of benefit
Chapter18: Asymmetric Information
Section: Chapter Questions
Problem 18.12P
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Scenario 2
Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function (sqrt c) . Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event.
Refer to Scenario 2
If an insurance company knows the probability of Tess experiencing an adverse event, what is the actuarially fair premium charged to Tess per $1 of benefit? Round to two decimal places
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