You are a property insurer and one of your potential clients, whose current wealth is $450,000, wants to insure her $250,000 house.  The chances of the house burning down in any given year are one in one thousand.  There are no other risks.  Will she buy insurance from you if you set the premium at $300?  Assume that her utility function is u(W) = ln(W) .  How sensitive is the maximum premium she is willing to pay to her current wealth?  Calculate the elasticity of the premium to wealth to ?nd out.  (Hint: In class we refer to the Markowitz risk premium as the difference between expected wealth and the certainty equivalent,  E (W) - CE , which is valid only for fair gambles.  In this case, the gamble is not fair, so you should compute the insurance premium as the cost of the gamble, namely, W₀ - CE .)

Posted Date: 3/15/2013 3:46:58 AM | Location : United States

Ask an Expert

Related Discussions:- Calculate the elasticity of the premium, Assignment Help, Ask Question on Calculate the elasticity of the premium, Get Answer, Expert's Help, Calculate the elasticity of the premium Discussions

Write discussion on Calculate the elasticity of the premium
Your posts are moderated

Write your message here..

Related Questions

Explain regression model, In a study relating college grade point average t... In a study relating college grade point average to time spent in various activities, students are asked how many hours they spend each week in four activities: studying, sleeping,

Equation prove, prove that summation k =0 and summation kxi=1 prove that summation k =0 and summation kxi=1

Future economic growth, What trends do you see in the Economic, Political, ... What trends do you see in the Economic, Political, and Cultural environment of society that will affect the industry in the future? Answer) The trends that will affect the indus

Maximising levels of capital, A perfectly competitive firm hires its machin... A perfectly competitive firm hires its machines at a constant rental rate of r = 5 euros per unit and its workers at a constant wage rate of w = 4 euros per unit. It can also sell

Dropout equation - unemployment variable, Consider the following equations ... Consider the following equations designed to estimate  a school's test scores (Test) and the school's dropout rate (Drop). Test i = B 0 + B 1 *Parent Ed i + B 2 *school quali

Modelling and multicollinearity, write a term paper on modelling and multic... write a term paper on modelling and multicollinearity

Homoscedasticity and heteroscedasticity, Probelm: (a) Differentiate bet... Probelm: (a) Differentiate between homoscedasticity and heteroscedasticity. (b) Outline the reasons why the variances of disturbance term may vary. (c) Given the 3 observ

Healthcare, How will government regulation impact decision making How will government regulation impact decision making

Coursework, Following the general methodology used by econometricians as ex... Following the general methodology used by econometricians as explained in the session for week 1 (eight steps), explain how you would proceed to determine if a good complies with t

What is the npv of the project, You are considering a new line of consumer ... You are considering a new line of consumer products. You expect revenues of $14 million in each of the next ten years, while expenses are half of revenues (all cash flows are assum