to a person. Explain the conditions under which an insurance company might offer insurance (against income loss) to individuals, even if it could not determine who might be hit with a large negative income shock and those who might be hit with a small negative income shock.
to a person. Explain the conditions under which an insurance company might offer insurance (against income loss) to individuals, even if it could not determine who might be hit with a large negative income shock and those who might be hit with a small negative income shock.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Your utility function is U = In(2C) where C is
the amount of consumption you have in any
given period. Your income is $40,000 per
year and there is a 2% chance that you will be
involved in a catastrophic accident that will
cost you $30,000 next year.
Suppose that 25% of the population is
comprised of individuals like you, who have a
probability of a catastrophic accident, and the
other 75% of the population will not face such
a shock. The insurance company knows the
incidence of catastrophic accidents in the
aggregate, i.e., at the population level, but not
to a person. Explain the conditions under
which an insurance company might offer
insurance (against income loss) to individuals,
even if it could not determine who might be
hit with a large negative income shock and
those who might be hit with a small negative
income shock.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fef7233d7-4397-467a-a085-6254173e1b18%2F55503dc8-ddc6-4722-ab28-e5e414a61fc9%2Fewiyisd_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Your utility function is U = In(2C) where C is
the amount of consumption you have in any
given period. Your income is $40,000 per
year and there is a 2% chance that you will be
involved in a catastrophic accident that will
cost you $30,000 next year.
Suppose that 25% of the population is
comprised of individuals like you, who have a
probability of a catastrophic accident, and the
other 75% of the population will not face such
a shock. The insurance company knows the
incidence of catastrophic accidents in the
aggregate, i.e., at the population level, but not
to a person. Explain the conditions under
which an insurance company might offer
insurance (against income loss) to individuals,
even if it could not determine who might be
hit with a large negative income shock and
those who might be hit with a small negative
income shock.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 6 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education