What is the break-even price for the insurance company

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Crop Insurance. Consider a state in which farmers are divided equally into two types: high risk and low risk. The average annual crop loss (and possible insurance claim) is $200 for a low-risk farmer and $1,200 for a high-risk farmer. (Related to Application 5 on page 631.)

a. If all farmers were to buy insurance, what is the break-even price for the insurance company?

b. Suppose a farmer will purchase insurance only if the price (the annual premium) is no more than 50 percent higher than his or her average crop loss. What is the equilibrium price?

Reference no: EM131145284

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