Question

Question 2

q = $1,000

I_H = $5,000

I_S' = $150

How do you describe this insurance policy?

full and fair insurance

full and unfair insurance

partial and fair insurance

not enough information to determine

partial insurance

13. In addition to info in Question number 2

assume r = $900 and p = 0.1 or 10%

What is the value of I_S ? What is the expected profit of the insurance company?

	$250; $800
	$50; $1,000

	$50; $900
	$50; $800

none of the above

14. How do you describe the insurance policy based on info from number 13?

	full and fair
	full and unfair

	partial and fair
	partial and unfair

Answer 1

Q12 : not enough information to determine

To determine if the insurance is full or partial we need information on both IH' and IS'. As only IS' is given and IH' is neither given nor can be calculate, it cannot be determined if the insurance is full or partial

To determine if the insurance is fair or unfair we need r, p and q. As only value if q is given, we cannot determine if the insurance is fair or unfair

Q13 : $ 50, $ 800

IS' = IS-r+q. As IS' is 150, r is 900 and q is 1000 we have 150 = IS-900+1000 = IS +100. Hence IS = 150-100 = $ 50

Expected profit of insurance company is given as r-pq = 900-0.1*1000 = 900-100 = $ 800

Q14 : Partial and Unfair

To check if the insurance if fair or unfair we need to compare r with p*q. p*q = 0.10*1000 = 100. As given r is 900, we can see that r pq. Hence the insurance is unfair.

To check if the insurance is full or partial, we need to compare IH with IS. From above question we know that IS is 50. Also from question 1 we have IH equals 5000. Hence IH-IS is equal to 5000-50 = 4950. Also q is given as 1000. As q IH-IS, we can see that the insurance is partial