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Why does the assumption of independence of risks matter in the examples of insurance? What would happen to premiums if the probabilities of houses burning were positively correlated? Can you think of a situation where they might be negatively correlated?

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Nusrat Fatima
Nusrat FatimaLv10
28 Sep 2019

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Related questions

The following equation describes the median housing price in a community in terms of

amount of pollution (nox for nitrous oxide) and the average number of rooms in houses in

the community (rooms):

log(price) = B0 + B1 * log (nox) + B2 *rooms + u

(i) What are the probable signs of b1 and b2 ? What is the interpretation of b1 ? Explain.

(ii) Why might nox [or more precisely, log(nox)] and rooms be negatively correlated? If

this is the case, does the simple regression of log(price) on log(nox) produce an up-

ward or a downward biased estimator of b1 ?

The following equation describes the median housing price in a community in terms of the amount of pollution (cox for carbon dioxide) and the average number of rooms in houses in the community (rooms):

log(price) = b0+b1log(cox)+b2rooms+u

A. What are the probable signs of b1 and b2? What is the interpretation of b1? Explain.

B. Why might cox [or more precisely, log(cox)] and rooms be negatively correlated? If this is the case, does the simple regression of log(price) on log(cox) produce an upward or a downward biased estimator of b1?

C. Suppose the following equation were estimated: 

log(price)=9.23-0.718log(cox)+0.306rooms, n= 506, R2=0.514.

log(price)=11.71-1.043log(cox), n=506, R2=0.264.

Is the relationship between the simple and multiple regression estimates of the elasticity of price with respect to cox what you would have predicted, given your answer in part B? Does this mean that -0.718 is definitely closer to the true elasticity than -1.043?

Does it matter if a central bank (Fed in the US) is independent of the government? Why do you think that matters? What would happen (or likely to happen) if the Fed was not independent of the US government? Can you think of any country that their central bank is not independent of their government?

 

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