Question
In: Economics
Partial Insurance: An individual has $2000 in physical assets, and $600 in cash initially. This person...
Partial Insurance: An individual has $2000 in physical assets, and $600 in cash initially. This person faces the following loss distribution to the wealth. Full insurance is available at $600
|
Probability |
Loss |
|
0.5 |
0 |
|
0.1 |
200 |
|
0.2 |
400 |
|
0.1 |
1000 |
|
0.1 |
2000 |
The Individual can also buy partial insurance with i. a $200 deductible, or ii. 75% coinsurance, or iii. Upper limit on coverage, with the limit being $1000. The premium on each partial coverage policy is $450. Provide a ranking of the four types of policies for the individual, in terms of preference if the preference function is given by U(FW) = LN(1+FW), where FW is final wealth of the individual.
Solutions
Expert Solution
| Probability | Loss $ | Loss forecast $ |
| P | L | P X L |
| 0.5 | 0 | 0 |
| 0.1 | 200 | 20 |
| 0.2 | 400 | 80 |
| 0.1 | 1000 | 100 |
| 0.1 | 2000 | 200 |
| 1.00 | Toal | 400 |
FW (no insurance) = Physical assets + cash - Total loss forecast = 2000 + 600 - 400 = $ 2200 [ RANK 1]
FW ( full insurance) = Physical assets + cash - Insurance Premium = 2000 + 600 - 600 = $ 2000 [RANK 2]
FW (partial insurance with $200 deductible) = Physical assets + cash - Insurance Premium (i.e., $450)- Deductible = $1950 [RANK 3]
FW (partial insurance with 75% co-payment) = Physical assets + cash - Insurance Premium (i.e., $450)- copayment ( i.e., 75% of total loss forecast) = 2000 + 600 - 450 - 300 = $1850 [RANK 4]
FW (partial insurance with $ 1000 limit) = Physical assets + cash - Insurance Premium (i.e., $450)- forecast value of expected loss of $ 2000 = 2000 + 600 - 450 - 200 = $1950 [ RANK 3]
Ranks for consumer are juxtaposed above as the utility function is based on LN (natural logarithm) of FW. In other words more the FW, higher the utility.
Rahul Sunny answered 2 years agoRelated Solutions
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2020
2019
Assets
Cash and cash equivalents
$600
$495
Accounts receivable
$626
$525
Inventories
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$240
Total current assets
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Net fixed assets
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Total assets
$3,101
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Liabilities and equity
Accounts payable
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$195
Accruals
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$180
Notes payable
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$195
Total current liabilities
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$570
Long-term debt
$356
$300
Total liabilities
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Cash
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Accounts payable
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Supplies
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Prepaid insurance
800
Land
24,000
Total
current assets
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Property, plant, and equipment:
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$43,700
Equipment
29,250
Total property, plant, and
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72,950
Total assets
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Liabilities
Current liabilities:
Accounts receivable
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Accum. depr.-building
12,525
Accum. depr.-equipment
7,340
Net income
11,500
Total
liabilities
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Owner's Equity
Wages payable
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Total owner's equity
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Total
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Assets
Current assets:
Cash
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Accounts payable
7,500
Supplies
2,590
Prepaid insurance
800
Land
24,000
Total
current assets
$42,060
Property, plant, and equipment:
Building
$43,700
Equipment
29,250
Total property, plant, and
equipment
72,950
Total assets
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Liabilities
Current liabilities:
Accounts receivable
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Accum. depr.-building
12,525
Accum. depr.-equipment
7,340
Net income
11,500
Total
liabilities
$41,365
Owner's Equity
Wages payable
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Total owner's equity
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Total
liabilities and owner's equity
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