please only do: if you can teach explain each part A risk neutral insurer offers to insure an individual with a wealth of 25 dollars against aloss of 21 dollars (i.e. leaving the individual with 4 dollars after the loss). The individual isequally likely to be either of two types, A or B, which differ only in the probability that theloss occurs. For type A, the loss occurs with probability 1/3, and for type B the loss occurswith probability 2/3. Both types have von Neumann-Morgenstern utility u(x)individual's type is not observable to the insurer.=√x. The(a) Suppose the insurer offers full insurance at a price p. The individual chooses onlywhether or not to buy this insurance; he cannot choose how much insurance to buy. Ifthe individual buys the insurance, he pays p to the insurer regardless of whether theloss occurs, and the insurer pays him the value of the loss (21 dollars) if the loss occurs.Assuming the insurer wants to maximize expected profit, at what price should she offerto sell the insurance?(b) At the profit-maximizing price, is the resulting allocation efficient?

Given information Initial wealth=25 Loss=21 For A-- Loss probability=0.33 and no loss=0.66 For B ---…

A risk neutral insurer offers to insure an individual with a wealth of 25 dollars against a loss of 21 dollars (i.e. leaving the individual with 4 dollars after the loss). The individual is equally likely to be either of two types, A or B, which differ only in the probability that the loss occurs. For type A, the loss occurs with probability 1/3, and for type B the loss occurs

A risk neutral insurer offers to insure an individual with a wealth of 25 dollars against a loss of 21 dollars (i.e. leaving the individual with 4 dollars after the loss). The individual is equally likely to be either of two types, A or B, which differ only in the probability that the loss occurs. For type A, the loss occurs with probability 1/3, and for type B the loss occurs

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 7MC

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