Suppose a $2,000,000 loss occurs randomly with a 1/200 chance. What is the actuarially fair premium? a. $20,000 b. $200,000 c. $10,000 d. $2,000,000
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Suppose a $2,000,000 loss occurs randomly with a 1/200 chance. What is the actuarially fair premium?
a. $20,000
b. $200,000
c. $10,000
d. $2,000,000
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- ↑ Consider the following FIRE INSURANCE PROBLEM where fire destroys a $300 (thousand) house.< INSURANCE PAYOUT INSURANCE PREMIUM 200 0 EVENT FIRE → NO FIRE PROBABILITY 0.02 0.98 OUTCOME 100 300 10 10 (a) What do we mean when we say an agent is Risk Averse? (b) Assume utility is U(x) = √(x). What is the expected payoff and expected utility of having no insurance? Show your work. (c) Suppose the Insurance Premium was $10. Would this risk averse agent buy insurance? Show your work and explain. (d) Suppose the probability of a fire rose to 5%. Would the agent buy insurance now? Show your work and explain.Tom wants to avoid any accidents on the work floor of his factory. If an accident does occur, itwould cost him $500,000 in damages. Installing safety equipment would decrease the probabilityof an accident occurring from 20% to 10%. However, the equipment costs $20,000 to install.10. What is his expected loss after installing the safety equipmenta. $20,000b. $50,000c. $100,000d. $125,000A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 50% if the plaintiff wins, the amount awarded to the plaintiff is X Will the plaintif settle if x is $62,500? What if X-$250,000? What is the critical value of X that would make the plaintiff indifferent between setting and going to trial? it the plaintiff were risk averse instead of risk neutral, would this critical value of X be higher or lower? If the amount to be awarded at trial with a win (X) were $62,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $250,000, then the plaintiff would not settle The critical value of X that would make the plaintiff indifferent between settling and going to trial is $ (Enter your response using rounded to wo decimal places)
- 1.) You have determined that if Generics Manufacturer A prevails against the government in court, its shares are worth $160. If it loses, it must pay a large settlement, meaning shares are only worth $34. The decision is expected later today and shares currently trade at $55. What probability is the market suggesting GMA has of winning? (Adapted from a Citi S&T Interview question).Suppose you own a house worth $500. However, there is a risk the house could burn down. If the house burns down, it will only be worth $25. There is a 5% chance the house burns down. However, you can buy insurance that will pay you if in the event the house burns down. Call the amount of insurance purchased K. The premium you have to pay for K dollars of insurance is 0.05×K. So, if hypothetically you wanted $100 of insurance, the premium would be $5. Assume you have log-utility u(x) = ln(x). What is the optimal amount of insurance, K ∗ ? (Note: the premium must be paid whether the house burns down or not.)for remain uninsured? S. Amanda has a utility of money function of u(w)-w4, Her initial wealth is w-$20,000 and she faces a .10 probability of a loss L $5,000; with probability 9 she suffers no loss. Calculate the amount of insurance Amanda will purchase if $1 of coverage costs $.10 per dollar of coverage. Would purchase any insurance if the cost per dollar of coverage was $.20.
- Imagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market. Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer Sellers want at least 4000 for a good computer and 1500 for a bad computer Assume that the buyer thinks that there is a 50% probability that the computer is of poor quality. What is the expected value and price of a computer that the buyer most wants to pay?Economics A group of 20,000 households in one neighborhood was covered in fire insurance that estimates a 2% probability of loss. Assuming that in the same neighborhood, the actual number of houses gutted by fire within one coverage cycle is 350 to 450. Requirements; a. Compute for the expected value of the loss.23. Captain Kidd has a map that has a 20% probability of leading him to a treasure worth 400,000 guineas. Independent of the fact of having a map, Capitan Kidd already has his own income equal to 90,000 guineas. Another pirate wants to buy the map from the Capitan Kidd (after selling the map Capitan Kidd has no chance to find a treasure). What is the minimum price for a map which the Captain Kidd will accept if Capitan Kidd has von Neuman- Morgenstern utility function is U(w) = w0.5, where w is his income level? a) 54,400 b) 32,500 c) 45,000 d) 90,000 e) There is no correct answer