Assume that the insurer can NOT distinguish between the two types of consumers, and can offer...

Assume that the insurer can NOT distinguish between the two types of consumers, and can offer only one policy (the same policy to everyone). What will be the breakeven policy premium IF everyone buys the policy? With such a premium, will everyone actually buy the policy? Over long run, what will be the equilibrium policy premium in the market and who will get insurance?

Expert Solution

The insurer will prefer to charge a high premium from the consumers who might default and will agree to charge a low premium from the consumers who have a lower chance of defaulting. Now, if the insurer doesn't know whether which type of customers are coming, then he will only agree to charge the premium, which is higher between two, so to reduce the chance of losses. The same thing applies to the consumers, the consumer who might default will agree to take the insurance even at a higher price, and the consumer who is not going to default will only be willing to buy at a lower premium price. Now, the breakeven point for such a situation will be at the position where the insurer agrees to charge his minimum premium. Now, this premium will be higher one, which is equal to what he is willing to give to a faulty consumer, as the insurer will not take a risk.
With such a premium, only the faulty consumers will buy the policies, and the non-default consumers will not but it. Now, in the long run, the equilibrium premium will be equal to the premium at which the insurer is agreed to sell the policy to the faulty consumer, and only the consumers who are going to default will buy this policy.

Rahul Sunny answered 7 months ago

Distinguish between two types of agglomeration:  Localization economies, and Urbanization economies?

Q1:Distinguish between different types of data

Q1:Distinguish between different types of dataQ2:What is the difference between a population and a sample in statistics?Q3:What is the purpose of hypothesis testing?Q4:How to interpret confidence intervals and confidence levels? Q5:Define: A. Null hypothesisB. Alternative hypothesisC. Type I errorD. Type II errorQ6Why the p-value is important?

. A monopolist faces two types of consumers: low demand consumers and high demand consumers. A...

. A monopolist faces two types of consumers: low demand consumers and high demand consumers. A high demand consumer has valuation equal to VH(q) = 10 + q - q 2 for q units of output and a low demand consumer has valuation equal to VL(q) = 10 + q - 2q2 for q units of output. There are equal numbers of each type of consumer. Marginal cost of production is constant and equal to c. The monopolist wishes to...

Consider a monopolist selling sweets to two types of consumers (assume sweets are infinitely divisible, so...

Consider a monopolist selling sweets to two types of consumers (assume sweets are infinitely divisible, so that the monopolist can sell any nonnegative, real quantity). The demand function of consumers of type 1’s is p1(q1) = 9 − 3q1. The demand function of consumers of type 2’s is p2(q2) = 8 − 5q2. The monopolist can produce sweets at no cost. There are equal numbers of both types of consumers. SOLVE by using calculus please SHOW STEP-BY-STEP solution please (a)...

Universal Savings & Loan has $1,000 to lend. They can offer one of two types of...

Universal Savings & Loan has $1,000 to lend. They can offer one of two types of loans. If they offer a risk-free loan, they will be paid back in full next year with 4% interest. If they offer a risky loan, there is a 20% chance that the borrower will default (pay back nothing) and an 80% chance the borrower will pay back in full with 30% interest? a. What are the expected profits for each type of loan? Which...

A) Define “Territorial Rights” that a franchisor may offer to a franchisee. B) Distinguish between a...

A) Define “Territorial Rights” that a franchisor may offer to a franchisee. B) Distinguish between a Direct Suit vs a Derivative Suit against a corporation.

a) Distinguish between any TWO (2) types of financial information contained in the various financial statements...

a) Distinguish between any TWO (2) types of financial information contained in the various financial statements in the Malaysian corporation. (10 marks for this question)

Two types of consumers (boaters and non-boaters) share a community on the seaside. Boating accidents can...

Two types of consumers (boaters and non-boaters) share a community on the seaside. Boating accidents can be reduced by lighthouse services. The boaters combined inverse demand for the lighthouse is P = 60 − 6Q, and the non-boaters combined inverse demand is P = 20 − 2Q. The cost of providing lighthouse services to the community is TC = Q2. a) Briefly explain why lighthouse services can be considered a public good. b) Find the optimal provision of lighthouse services...

5.a. Distinguish an offer from a promise. A) An offer is a provisional promise made by...

5.a. Distinguish an offer from a promise. A) An offer is a provisional promise made by one party subject to a condition or containing a demand to the other party, the recipient of the offer. The offer does not imply a legal obligation while the promise does. B) An offer is a provisional promise made by one party subject to a condition or containing a demand to the other party, the recipient of the offer. An offer involves a legal...

Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to...

Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a negative GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP? What is core inflation? Why is it calculated?

Question