MICROECONIMICS
5th Edition
ISBN: 9781319372101
Author: KRUGMAN
Publisher: MAC HIGHER
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Question
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 MUy is risk aversive who will attempt to lower uncertainty by avoiding gambling, while a person with an increasing MUy 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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