Chapter 2, Problem 2.16P

Suppose the market for auto insurance is made of up two types of buyers: high-risk and low-risk. Buyers’ willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined in a photo    Assume now that there is asymmetric information and that insurance companies do not knowhow risky an individual buyer is. In the face of this uncertainty, they determine that the probability that a “walk-in” is high-risk is 0.75.   What is the minimum price sellers are willing to accept when selling aninsurance plan? At this price, will low- and high-risk buyers both be willing to purchase this insurance plan? Explain. Be sure the mention adverse selection in your answer.   Returning to the conditions outlined in Q1, suppose that buyers of auto insurance (high- and low-risk) were offered a $1,000 subsidy to purchase coverage. This would raise their WTP by $1,000. Would the market for both insurance plans clear after the…

The promoter of a football game is concerned that it will rain. She has the option of spending ​$14,040 on insurance that will pay ​$39,000 if it rains. She estimates that the revenue from the game will be ​$65,040 if it does not rain and ​$30,040 if it does rain. What must the chance of rain be if buying the policy has the same expected return as not buying​ it? Write expressions showing the expected returns if the promoter does and does not purchase the​ insurance, using p to represent the probability of rain.   Without​ insurance, E(return)​ =   With​ insurance, E(return)​ =   The chance of rain must be _%.

Suppose X and Y are two dependent random variables. Let Z = (3X - 2Y + 4) with the following set of information provided: E(X2)= 25 EX) = 3 E(Y2)= 28 E(Y)=4 E(XY) = 20 What is var(Z)? O a. 172 O b. 96 OC. 22 O d. 28