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
"Dr. Arata Kochi, the World Health Organisation malaria chief,... [says that] eradication is counterproductive. With enough money, he said, current tools like nets, medicines and D

EOQ formula  The EOQ equation assumes demand is constant and steady. It also assumes that demand for different items is independent. This is inappropriate for controlling inve


what are the recommendations for effective economic planning?

What two measures have been developed in recent years that subtract for the depreciation of both manufactured capital and natural capital? The environmentally adjusted Net Dome

The owner of a firm Mr. Rajneesh expects to make a profit of Rs.5,50,000, Rs.6,50,000, Rs.7,50,000 and Rs.8,50,000 at the end of the 1st, 2nd, 3rd and 4th year respectively. Rajne

(a) What  are the problems associated with R 2 and how can adjusted R 2 solve them? (b) If the regressors  in an equation are highly correlated, which measures can be used to

Open Access Regime Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Special Drawing Rights: The late 1960s witnessed that the growth in world resources did not keep pace with the growth in international trade. The slackness in the growth of re

Variable and Total cost curve    * Consequently (from the table which is given): - MC initially decreases with increasing returns  0 through 4 units of output