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[Exam Tutorial] ECO206 Term Test 2 Question Solutions

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reservation price insure himself from risk +0) and Xc, or thebetween (x • Actuarially Fair Insurance: when the cost of the premium for insurance is equal to the expected benefit of receiving insurance • When insurance is actuarially fair, the individual wiUinsure themselves in full. When insurance is actuarially unfair, the expected benefit from insurance will be less than the cost of insurance, therefore the individual will consumes less than full coverage of insurance • ~jsk premium: graphically the diffeA.It is the amount of inisme a person willing to give up in order to avoid a risky situation (averse) or engage in one (loving) • individuals. Therefore, they will not fully insure themselves if they are in a bad state (e.g. lose a family member). • 2 reasons why an individual would not fully insure themselves: 1. Insurance is actuarially unfair 2. State dependent preferences Summary of Questions to be asked: • Calculating and illustrating expected wealth, expected utility, certainty equivalent and demand for insurance • Identifying individuals as risk averse, risk loving and risk neutral • Identifying actuarially fair insurance, good vs. bad states and whether an individual will demand full coverage or not Related Past Test Questions: 20U Midterm ITQuestion 1 (0.The expectwl saA~ .W"loU,v-~ nr5}-,S 40.000 The ~ ~ tudu-··lWl Set:.& O offer t..S 1}0,,)00 t-D-~ tLlO,oOO) ., /).5:"10) e 1./0.000 (b) (EApecJetJ)LttiLi'tlj ~ offev1.~ U_,:?.(LJODOO) .,IO{"o,O(Jo = rg:2DDq] fL1f.}ed u tli»h; W"f1gy aJfe¥ 2~ . _) ~ ) r o.t:;a {ro ,(}) t-,0Jb()Itx1J o.s (_J.£20Or».) + 10 ":lD, t)OO L - ) IN/outYJflJ,. 01 bO"tASo Ctrt>frJ ::fE _Q I)2] D(I oFkv 1_ q\ves (Al()19~rLLVlAtlj (V0009 00l~ 0...\- A ·-) fuJ+- oPti~ ,fO/9"0+ "v~s,~~\)! 1hX 0)\J!'-¥Yl'\X)~ }odJd?W"OS 0'1fhqpd5VJnu,'))JOCfO) fJ(Of,7rf'tU'~/ Wl1l_\J,Ltd41-0WOVj s~h~O\.ALOO~ vo~~<1~ d8Yrtr.J~ ~\A? -lCY1A-y\lSY' ''X,IW \1}~O ~ v IO~,-" ro4,h>J /)CfO\ \OW~ ~ IUO.'fYYpwd """lor)1 ?M -j\ :~OwO,,\.i;I vm s O f- ,t Q~ - Q~Q c e,-_t40 *'~ W vrcn 0('0-fur('C\ Cc_:.&5 Qc. } Q~ - Qc_(f> fct ,55 \--~Cc O J\~ ~c.G. la) ~ 1 150 +dlQe, - c__-:>MCr\ ~('(\ ?ret'tMo.)(·?v"Oble.»J\·· ?-::M L roc ~c.he_~', e;o~ ~ S \'~ OJ'U..\....V-) \. ~ lLl0 -:~o tc?~~ _ Q,- \ o:-- cq ~- q 0 - 'FocYI£l.,I.X"~ , 55::gs- f-Q C:H\)~-90) - Q& t;;S-:: tJDa-Qc, -CQe 55-:...-}ljQ~ - '8'0 -q ~ 2(0 -:3CV~ ,ot-cuf(W'CJ/I..tq,J =-=to ~ Qc* ~5'0 ~ '>n(;;(51))t! ;n ' -'!tl~( Profit" 'I--((0 iLID) ,('0x ~)) - '1D(SD('tO),rif ,OlS-O)) ~ - :J-:L(00 ~--, O-h-~-(JJ-s-t-· [c) T'f\e0'((Y'16 ,b~ex off-procLu.~ 00 t1_90cX iD beCCUA/K- of f-he StNbShtutajol Ltij of m e..~ 9 pods ('() PlDcLu,c:h'{](},. \ • eM {)'Ie-eLL ~5 0~ ~lrlfj I I-rctQperdarce. \(rY\curtj\~ CC'S.tcs. . Ht~: ~ tb2Q~:: I~o
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