ECN 700 Study Guide - Final Guide: Risk Neutral, Risk Aversion

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straightshooter

23 Oct 2021

School

Ryerson University

Department

Economics

Course

ECN 700

Professor

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Document Summary

There are two questions and 32 points in total. Question 1 a risk averse individual faces uncertainty with two outcomes: good, bad. The individual has income under good and under bad outcome. The probability of good outcome is 4/7 (so the probability of bad outcome is 1 " 4/7 = 3/7). The individual can buy any non-negative x units of insurance. Every unit of insurance has price and it pays in the event of bad outcome. In this insurance market, the unit price of insurance is known to be p = 1/2. (a) [2 points] determine if the insurance market is competitive or not. (b) [6 points] suppose the individual buys x units of insurance. Determine the individual"s net income under good income, net income under bad income and the average net income.

Related Questions

An insurance company sells policies to three individuals. Each individual will have a 20% chance of losing 75 due to an accident, and each one will pay 25 for full insurance. Also, the risks associated with these individuals are independent. We use the symbol A to denote "accident" and N to denote "no accident". "ANN" represents the outcome when the first individual has an accident, while the second and third individual does not have an accident.

Outcome	Probability	Insurance Companyâs Profit
AAA	0.2 Ã 0.2 Ã 0.2 = 0.008	(25 Ã 3) â (75 Ã 3) = â150
AAN	0.2 Ã 0.2 Ã 0.8 = 0.032	(25 Ã 3) â (75 Ã 2) = â75
ANA	0.2 Ã 0.8 Ã 0.2 = 0.032	(25 Ã 3) â (75 Ã 2) = â75
ANN	0.2 Ã 0.8 Ã 0.8 = 0.128	(25 Ã 3) â (75 Ã 1) = 0
NAA	0.8 Ã 0.2 Ã 0.2 = 0.032	(25 Ã 3) â (75 Ã 2) = â75
NAN	0.8 Ã 0.2 Ã 0.8 = 0.128	(25 Ã 3) â (75 Ã 1) = 0
NNA	0.8 Ã 0.8 Ã 0.2 = 0.128	(25 Ã 3) â (75 Ã 1) = 0
NNN	0.8 Ã 0.8 Ã 0.8 = 0.512	(25 Ã 3) â (75 Ã 0) = 75

1. Find the expected value of the prospect that faces the insurance company.
2. Compare the prospect in 1. to the prospect faced by a company insuring one person. Which company will be more likely to lose money?
3. Based on your answer in 2., try to explain why insurance companies are willing to take on more risk when the insure many individuals.

Which of the following is a problem that arises in a health insurance market?

1. There exists a fierce competition between the insurance providers.
2. A disproportionate number of high-risk individuals are attracted to buy insurance.
3. There are a large number of buyers of various insurance programs.
4. Only risk-averse individuals buy insurance.