Wednesday, October 14, 2015

Excel Homework Due 10/20 at 11 PM

This one you should find interesting.  It is on insurance under private information.  A person could be a low risk (low probability of loss) or a high risk (high probability of loss) but there are no distinguishing features that lets the insurance company know which type an individual is.  The individuals know which type they are, but if low risk types get better rates then both types have incentive to claim they are low risk.  The market must somehow address this incentive problem.

11 comments:

  1. Even after going through the presentation I'm having a hard time figuring out what equations to use for each problem, starting with number 1.

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  2. Two facts should get you the answer to the first question.
    (a) The premium equals the expected payout of coverage when insurance is fair.
    (b) In this case the premium is the x variable and the coverage is the y variable, so you need to take the equation implied by (a) and invert it. That will give you the slope.

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  3. Is there anyway you could elaborate on the payout of coverage? Is that just the probability of loss times the potential loss?

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    1. When loss occurs the coverage, I, is paid to the insured. The insured cares about the expected loss. The insurance company cares about its expected payout of coverage. The two are the same when I = L. Otherwise, they are different.

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  4. I'm still not getting it. Do you have office hours tomorrow at all?

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    1. Send me an email about when you'd like to to meet. This will happen in the BIF Commons. I do not have an office. As of now, the afternoon is better than the morning.

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  5. For the question regarding utility when there is a fixed load but no insurance provided, wouldn't we need the value of the fixed load to find utility?

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    Replies
    1. I am having a hard time with this part as well.

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    2. With no insurance provided this is the expected utility of the original lottery.

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  6. I'm meeting at least one student at BIF this afternoon at 2 PM to discuss the homework. Others are welcome to join us.

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