Assume that consumers are identical in all respects expect for their loss probabilities; some are high risk, and others are low risk.

Assume that consumers are identical in all respects expect for their loss probabilities; some are high risk, and others are low risk. Members of the high-risk group have loss probability pH = 65%, whereas members of the low risk group have loss probability pL = 35%.Each consumer has initial wealth of $100 and utility U(W)=W.5.There are only two possible states of the world, loss and no loss. If a loss occurs, then consumers lose their initial wealth of $100. Insurance contract offeringsPolicy A provides full coverage for a price of $65.Policy B provides full coverage for a price of $45.50.Policy C provides 60% coverage for a price of $39.Policy D provides 30% coverage for a price of $13.65.Which policy pair should you offer, assuming that you are interested in maximizing profit?

Order the answer to view it

Assignment Solutions
Assignment Solutions