ACCPT2 Flashcards
What is the probability of a good and bad event?
P of bad = PIE
P of good = (1-PIE)
What is the cost and payout of insurance?
Cost = Y per unit
Payout = k
What is consumption in the good and the bad state?
CG = EG - Yk
CB = EB + k - Yk, = EB + k(1-Y)
What is the slope of the budget line in the insurance model?
-1/(1-Y)
What is EU(CB,CG)?
EU = PIEU(CB) + (1-PIE)U(CG)
When is an individual risk-averse?
Risk-averse if U’‘(C)<0
What is the MRSb,g?
EU’(CB)/EU’(CG)
=PIEU’(CB)/(1-PIE)U’(CG)
What does the 45-degree line represent?
It represents when an individual is fully insured and creates certainty
Why may an indifference curve be steeper than another in the insurance model?
A higher risk individual will have a steeper indifference curve.
Why may an indifference curve be steeper than another in the insurance model?
A higher-risk individual will have a steeper indifference curve.
Why may an indifference curve be steeper than another in the insurance model?
A higher-risk individual will have a steeper indifference curve.
Why may an indifference curve be steeper than another in the insurance model?
A higher-risk individual will have a steeper indifference curve.
What is the EC (expected consumption)?
EC = PIECB + (1-PIE)CG
How do we solve for the certainty equivalent assumption (CEC)?
-U(CEC) = EU
-U(C) = aC - bC^2
-EU = aCEC - bCEC^2
-aCEC-bCEC^2-EU=0
