Premium of fair insurance, cost of policy, risk behavior and moral hazard with insurance Concept Introduction: Expected Value - The aggregate of the products of the dollar value associated with each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions. This is also called the Mathematical Expectation or the EV of an economic experiment. Risk Aversive and Risk Loving behavior - A person with a decreasing MU y is risk aversive who will attempt to lower uncertainty by avoiding gambling, while a person with an increasing MU y is a risk loving person. A Risk neutral person is indifferent between choices with equal expected payoffs even if one of the choices is riskier. Fair Insurance Policy - A policy is said to be fair if the premium paid equals the expected value of the compensation received.

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Chapter 20, Problem 6P

To determine

Premium of fair insurance, cost of policy, risk behavior and moral hazard with insurance

Concept Introduction:

Expected Value- The aggregate of the products of the dollar value associated with each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions. This is also called the Mathematical Expectation or the EV of an economic experiment.

Risk Aversive and Risk Loving behavior- A person with a decreasing MU_yis risk aversive who will attempt to lower uncertainty by avoiding gambling, while a person with an increasing MU_y is a risk loving person. A Risk neutral person is indifferent between choices with equal expected payoffs even if one of the choices is riskier.

Fair Insurance Policy- A policy is said to be fair if the premium paid equals the expected value of the compensation received.

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