5. Exercise 4.9. Mandatory Insurance. Consider a city with 100 drivers and a perfectly competitive market for automobile insurance. The demand curve for auto insurance is linear and negatively sloped, with a slope of -$10 per customer. At the initial price of $1,500, half the city's drivers (50 drivers) buy insurance. The price is just high enough to cover all the costs of providing insurance, including a 50 percent premium to cover the costs associated with uninsured drivers. Suppose the city makes auto insurance mandatory. Predict the new equilibrium.

5. Exercise 4.9. Mandatory Insurance. Consider a city with 100 drivers and a perfectly competitive market for automobile insurance. The demand curve for auto insurance is linear and negatively sloped, with a slope of -$10 per customer. At the initial price of $1,500, half the city's drivers (50 drivers) buy insurance. The price is just high enough to cover all the costs of providing insurance, including a 50 percent premium to cover the costs associated with uninsured drivers. Suppose the city makes auto insurance mandatory. Predict the new equilibrium.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $110, the probability of a fire is 0.1%, and in the event of a fire, the insured damages (the payout on the policy) will be $100,400.a. Suppose you own the entire firm, and the company issues only one policy. What are the expected payout, expected profit, variance and standard deviation of your scenario? (Enter all answers in dollars, rounded to 2 decimal places. Round Profit to the nearest whole dollar.) b. Now suppose your company issues two policies. The risk of fire is independent across the two policies. Make a table of the payout and profit, along with their associated variances and standard deviations. (Enter all answers in dollars, rounded to 2 decimal places. Round Profit to the nearest whole dollar.) c. Continue to assume the company has issued two policies, but now assume you take on a partner, so that you each own one-half of the firm. Make a table of the possible payout and profit…
Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $110, the probability of a fire is 0.1%, and in the event of a fire, the insured damages (the payout on the policy) will be $100,400.a. Suppose you own the entire firm, and the company issues only one policy. What are the expected payout, expected profit, variance and standard deviation of your scenario? (Enter all answers in dollars, rounded to 2 decimal places. Round Profit to the nearest whole dollar.) b. Now suppose your company issues two policies. The risk of fire is independent across the two policies. Make a table of the payout and profit, along with their associated variances and standard deviations. (Enter all answers in dollars, rounded to 2 decimal places. Round Profit to the nearest whole dollar.) c. Continue to assume the company has issued two policies, but now assume you take on a partner, so that you each own one-half of the firm. Make a table of the possible payout and profit…
4. What is a Break-even Point and why do managers calculate it? 5. Branton Electric is considering the purchase of an entire cargo container filled with upgraded utility meters for $20,000. Branton can charge $50 for the installation of each upgraded meter, while the actual cost of the installation would be only $15. How many utility meter upgrades are necessary for Branton Electric to break even on this purchase? (Quick Start #16) 6. What are the advantages and disadvantages of using a conservative strategy of Capacity versus an Aggressive strategy?
1. Suppose a proposed new road to be constructed in North Carolina between Raleigh and Morehead City will lower the average cost per trip by car from $5 to $4. Currently, 500,000 trips are made between the two cities per year. An estimate indicates that, all other things being equal, the new road will increase the number of trips per year to 600,000. Calculate the annual benefits to motorists of the new road as based on their willingness to pay. 2. A new tax is levied on airline profits to finance improvements in the nation’s airports. The current market rate of interest is 8 percent. However, airline profits are subject to a 50 percent tax. A cost-benefit analysis calculates the percent return to the investment in new air facilities to be 12 percent. Will net benefits from resource use increase as a result of construction of new air travel facilities?
Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $150, the probability of a fire is 0.1%, and in the event of a fire, the insured damages (the payout on the policy) will be $140,000. Required: a. Make a table of the two possible payouts on each policy with the probability of each. (Negative answers should be indicated with a minus sign.) b. Suppose you own the entire firm, and the company issues only one policy. What are the expected value, variance, and standard deviation of your profit? (Do not round intermediate calculations. Round your standard deviation to the nearest whole number.) c. Now suppose your company issues two policies. The risk of fire is independent across the two policies. Make a table of the three possible payouts along with their associated probabilities. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decimal places.) d. What are the expected value, variance, and…
1. Suppose a proposed new road to be constructed in North Carolina between Raleigh andMorehead City will lower the average cost per trip by car from $5 to $4. Currently, 500,000trips are made between the two cities per year. An estimate indicates that, all other thingsbeing equal, the new road will increase the number of trips per year to 600,000. Calculatethe annual benefits to motorists of the new road as based on their willingness to pay.
5.5. You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows: Revenues (10,000 visits) Wages and benefits Rent Depreciation Utilities Medical supplies Administrative supplies $400,000 220,000 5,000 30,000 2,500 50,000 10,000 Assume that all costs are fixed, except supply costs (medical and administrative), which are variable. Furthermore, assume that the clinic must pay taxes at a 30 percent rate. a. Construct the clinic's projected P&L statement. b. What number of visits is required to break even (revenue covers all accounting costs)? c. What number of visits is required to produce an after- tax profit of $100,000?
You are planning a trip to Washington, DC, which is about 1,000 miles from your home. You would not mind either taking the bus or driving your car. (That is, you can ignore implicit or opportunity costs in this analysis.) The bus fare to DC is $200. You also know that you incur the following costs of operating your car during a typical 10,000-mile driving year: Insurance $ 900.00 Interest on auto loan $ 1,800.00 License and registration $ 100.00 Fuel and oil $ 1,000.00 Tires $ 100.00 Maintenance $ 700.00 TOTAL $ 4,600.00 What will be your decision: should you drive or take the bus? [Hint: Show me a little calculation here.
CH Misu Sheet, owner of the Bedspread Shop, knows his customers will pay no more than $150 for a comforter. Misu Sheet wants to advertise the comforter as "percent markup on cost." a. What is the equivalent rate of percent markup on cost compared to the 20% markup on selling price? (Round your answer to the nearest hundredth percent.) Rate of percent pok int ences b. Is this a wise marketing decision? O Yes No aw %3D w Aa MacBook Air
CVP and Margin of Safety Bristol Car Service offers airport service in a mid-size city. Bristol charges $50 per trip to or from the airport. The variable cost for a trip totals S12, for fuel, driver, and so on. The monthly fixed cost for Bristol Rainbow Tours is S2,736. Required 1-How many trips must Bristol sell every month to break even? 2-Bristol's owner believes that 90 trips is a reasonable forecast of the average monthly demand.What is the margin of safety in terms of the number of airport trips!
1. A grocery store chain must decide whether to build a regular or a large store in Future City. There is also the option of not opening any store at all. The decision depends on the market potential of Future City and this potential might be high, medium, or low. The potential profits in each case are shown in the payoff table below (in P1,000): High Medium Low Regular 17,500 9,500 -3,000 Large 32,000 11,500 -4,500 None 0 0 0 Identify the decision to be made, the decision alternatives, the chance event and the states of nature for this problem. What alternative should be chosen under the maximax criterion? What is the payoff for this decision? Determine the minimax regret decision. Given that the probabilities of high, medium and low market potentials are 0.35, 0.45, and 0.2, respectively, determine the optimal decision using the Bayes’ decision rule (expected value approach). 2. Construct a decision tree for Problem #1 to help you in your decision analysis. What…
NEED ASAP with a complete solution! A particular university was considering whether to offer a seminar for executives. The tuition would be USD 650 per person. Variable costs, including meals, parking, and materials, would be USD 80 per person. Certain costs offering the seminarIncluding advertising, instructors' fees, room rent, audiovisual equipment rent would not be affected by the number of people attending Such costs. which could be thought of as fixed costs amounted to USD 8,000 for the seminar. • Given this information. If the school wanted at least to break even on this program, how many students should they expect to attend? a) 15 b) 14 c) 20

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS