Question regarding the insurance benefit the company

Assignment Help Macroeconomics
Reference no: EM131085817

Suppose the function u(x) = ln(x) where x is consumption represents your preference over gambles using an expected utility function.

You have a probability δ of getting consumption xB (bad state) and a probability 1 of getting xG (good state).

(a) Find the certainty equivalent xCE of the gamble.

Hint: use the fact that αln(x0) + βln (x1) = ln(x0αx1β) for any positive numbers xand x1.

(b) Find the risk premium of the gamble.

[Edit: the following info is for parts c-e]

Now let δ = 0.1, xB = 10 and x= 100.

An insurance company allows you to choose an insurance contract (b, p), where b is the insurance benefit the company pays you if bad state occurs and p is the insurance premium you pay the company regardless of the state.

Suppose the company's offer is p = 0.2b. You may choose any combination of (b, p).

(c) Is the insurance contract actuarily fair? How much will you insure (i.e. find your optimal p and b)?

Hint: Refer to Section 17B.1.4 (p. 599-600) of the textbook or slide 20-22 of Chapter 17 for an illustration of choosing actuarily fair insurance.

(d) What will your consumptions be in the two states with the insurance. Are you fully insured?

(e) What is the expected profit of the insurance company from the contract?

Reference no: EM131085817

Questions Cloud

Discuss the causes of and risk factors for the problem : How effective is the treatment? Discuss any barriers to treatment such as side effects or high cost.
Examine article- are great leaders born or are they made : Describe the leadership strategies employed by that organization to reflect flexibility, promote sustainability, foster effective change management, and further organizational goals.
The other is heavy truck used to haul equipment : Your small remodeling business has two work vehicles. One is a small passenger car used for job-site visits and for other general business purposes. The other is a heavy truck used to haul equipment. How many miles would you have to drive the car bef..
What is the student's mean score in the class : A student receives test scores of 62, 83, and 91. The student's final exam score is 88 and homework score is 76. Each test is worth 20% of the final grade, the final exam is 25% of the final grade, and the homework grade is 15% of the final grade...
Question regarding the insurance benefit the company : An insurance company allows you to choose an insurance contract (b, p), where b is the insurance benefit the company pays you if bad state occurs and p is the insurance premium you pay the company regardless of the state.
Bond investment could offer higher yield and lower risk : Beth Anaheim is a 70-year-old retiree who has been referred to ACG by a current ACG client. Beth's main investment objectives are safety of principal and current income. Her retirement income sources include social security, rental income from a comm..
Question regarding the pay for goods and services : What is this controls how much we pay for goods and services. For example, when the iphone 6 came out, the supply was little or unknown so people were willing to pay a lot for the phone; the price was high.
Distinction between the short-run and long-run : In economics, what is the distinction between the short-run and long-run? Do these refer to specific time periods of actual time?
Why journal article is relevant to career specialization : Discuss why the journal article is relevant to your career specialization -  Report the results of the statistical test using proper APA guidelines.

Reviews

Write a Review

 

Macroeconomics Questions & Answers

  Calculate the profit-maximizing activity level

Dot.com Products, offers storage containers for fine china on the Internet. The corporation is the low-cost retailer of these quilted boxes with fixed costs of $480,000 a year,

  How much larger is the change in gdp

Suppose we want to compare the effect of a tax cut in the economy given in the first problem to the effect of the same size tax cut on an economy with a MPC of 0.8.  If everything else about these two economies is the same (except for their MPCs),..

  Discuss the four major economic flows that link

Discuss the four major economic flows that link the United States with other nations and provide a specific example to illustrate each flow.

  Janice j and kelly k like fireworks displays the marginal

janice j and kelly k like fireworks displays. the marginal benefit curve for janice is mbj9-q. kellys mbk27-3q. q is

  Elucidate when did we have the last major tax increase

Elucidate when did we have the last major tax increase. How did the economy react to that over the next few years.

  What is the equilibrium level of real gdp

What is the saving function? What is the marginal propensity to save and what is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw?

  Draw the aggregate demand and aggregate supply diagram

Draw the aggregate demand and aggregate supply diagram four years from now provided your policy recommendations are undertaken.

  Illustrate what price is required to maximize income

Illustrate what price is required to maximize income but keep profits at a minimum of $300?

  What would you predict for the real exchange rate

Suppose China exports TVs and uses the yeah as its currency, whereas Russia exports vodka and uses the ruble. China has a stable money supply and slow, steady technological progress in TV production, while Russia has very rapid growth in the money..

  Describe gretas short-run production function

Greta starts an internet-based grocery delivery service. His employees must perform one of three activities:  Administrative work: Exactly 2 workers are necessary to perform the administrative work for the business to operate. The administrative wo..

  Is the subsidy a good investment on the part of the govts

Boeing believes there is a 50% chance that either government will grant the subsidy, and that the subsidy decision will be made simultaneously and independently, with no collusion between governments. Boeing must invest in the project before they ..

  Production for half of what canada produces

In particular, suppose the US trades Canada half of its production for half of what Canada produces? How many additional shirts will the US have adter the trade? How many additional boots?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd