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
INTERNATIONAL FINANCE CORPORATION: The IBRD loans are available only to member-country governments or with the guarantee of member-country governments. Further, IBRD can only

large firms charge the price which is higher than the small firms, contruct the diagram

This research will follow the methodology of econometrics; Chao, 2005; Castle & Shephard, 2009): 1. Specification of the model using a specific stochastic equation, together wit

Perceived Value Pricing This refers to a pricing strategy that dictates that the price of a given item will be set based on the customer's perception of the value of that item

1.  Clorox lowers the price of its GreenWorks TM bathroom cleaner.  All other things remaining the same, choose how you think this will impact the market price of Pine-Sol. (Circl

Frictional and Cyclical Unemployment: Frictional Unemployment: It refers to unemployment caused by changes in individual labour markets. This is the type of unemploymen


Please provide detailed answers, showing all your work, to all five sections in problem 15.9 in the Nicholson and Snyder book. This is an individual take home task due at 11:59pm o

The market structure in the south African mobile telecommunications industry