Achieve for Economics (1-Term Online)
5th Edition
ISBN: 9781319372040
Author: KRUGMAN, Paul
Publisher: Macmillan Higher Education
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Question
Chapter 20, Problem 14P
To determine
To determine: The cost of a fair insure policy and if following people will take the insurances in the given situations.
Concept introduction
Expected Value: It is defined as the weighted average of probable events where the weights of each probable value corresponds to the chances of that value occurring. The formula to calculate expected value is:
Where,
is expected value. 
is probability of event 1. 
is probability of event 2. 
is probability of event N. 
is event 1. 
is event 2. 
is event N.
Expected Utility It is defined as the value of a person’s total utility, so that there is no certainty for future results.
Fair Insurance Policy: It is an insurance policy in which the money offered by the company is equal to the expected value.
Risk Neutral: Any person who does not care for any kind of risk is known as risk neutral.
Moral Hazard: It is a situation of imperfect knowledge which leads to market failure. Example: A person who is insured against something does not bother about that thing.
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