Suppose the Ajax Insurance Company Provides Insurance for Skydivers Whose

question 15

Multiple Choice

Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400.An accident will leave divers with a wealth of $100.The company divides the divers into two classes: safe (probability of an accident = 0.2) and unsafe (probability of an accident = 0.5) .The utility of wealth for all divers is given by the function: U(w) = w^0.5.If only the unsafe divers buy insurance and the premium is $100,the insurance company will:

• A) earn a profit of $100 per unsafe diver.
• B) break even.
• C) incur a loss of $200 per unsafe diver.
• D) incur a loss of $300 per unsafe diver.
• E) experience none of the above.

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Definitions:

Natural Rate

The long-term unemployment rate that is observed once the effect of short-term cyclical factors has been removed, considered to be the rate of unemployment consistent with a stable rate of inflation.

Short-run Phillips Curve

A curve illustrating the inverse relationship between the rate of inflation and the rate of unemployment in an economy for a short-term period.

Expected Inflation

The rate at which consumers, businesses, and investors expect prices to rise over a future period.

Long-run Phillips Curve

The long-run Phillips Curve is an economic concept that illustrates the relationship between inflation and unemployment, suggesting that in the long run there is no trade-off between these two factors.