Example of insurance - reducing risk, Microeconomics

The Value of Title Insurance While Buying a House

*  A Scenario:

- Price of house is $200,000

- 5% chance that seller does not own house

*  Risk neutral buyer would pay:

  Risk averse buyer would pay quite less

*  By reducing the risk factor, title insurance increases the value of house by an amount much greater than premium.

*  Value of Complete Information 

- The difference between expected value of choice with complete information and expected value when information is incomplete.

*  Assume that a store manager must decide how many fall suits to order:

- 100 suits cost $180 per suit

- 50 suits cost $200per suit

- The price of suits is $300

* Assume that a store manager must determine how many fall suits to order:

- Unsold suits can be returned for ½ cost.

- The probability of selling each quantity is 50 percent.

With the incomplete information:

- Risk Neutral: Buy 100 suits

- Risk Averse: Buy 50 suits

*  The expected value with the complete information is $8,500.

- 8,500 = .5(5,000) + .5(12,000)

* The expected value with the uncertainty is $6,750.

 The value of complete information is $1,750.

*  An Example

- Per capita packed milk consumption over years has fallen

- The milk producers which is engaged in market research to develop new sales strategies to encourage consumption of packed milk.

*  Findings

- Packed milk demand is seasonal with greatest demand in summer

- Ep is negative and small

- EI is positive and large

* Milk advertising increases sales most in summer.

*  Allocating advertising based on this information in Karachi increased sales by Rs. 400,000 and profits by 9 percent.

*  The cost of the information was low relatively, while value was substantial.

Posted Date: 10/10/2012 9:04:09 AM | Location : United States







Related Discussions:- Example of insurance - reducing risk, Assignment Help, Ask Question on Example of insurance - reducing risk, Get Answer, Expert's Help, Example of insurance - reducing risk Discussions

Write discussion on Example of insurance - reducing risk
Your posts are moderated
Related Questions
7.Consider the following production possibilities table: Option Y X A 0 100 B 80 80 C 120 50 D 140 10 a)Provide a measure of the approximate marginal opportunity cost of

Substitution Effect -  The  substitution effect is change in an item's consumption associated with the change in the price of the item, level of utility held constant. -  Wh

How has the Haberler''s theory of opportunity cost an improvement over the classical theory of trade

"Cross-Correlations of output(t) with" "x(t-1)" [3,] "output" "0.3" [4,] "consumption" "0.1

Employee Communication More widely called internal communications, employee communication is must in retaining a happy and productive workforce. Internal communications to e

Discuss how the opportunity cost principle influence a supplier''s decision to supply labour

Effects of inflation: On Income Earners:Those on fixed incomes or assets (fixed in nominal terms) lose. However, those on incomes, which are directly related to the price leve

analyse the rise and fall in the price under market equillibrium situation?


Working Capital: A business requires a certain revolving fund of finance to pay for regular purchases of initial labour, raw materials and other inputs to production. Working capit