Suppose Ordinarily Half Your Class Would Get an a and Half

question 4

Essay

Suppose ordinarily half your class would get an A and half would get a B, with A students having a 25% chance of getting an A and B students having a 25% of getting an A.It costs $100 to persuade the instructor to raise a B grade to an A.A student is willing to pay $40 to insure she will get her usual grade and $70 to insure she will get a higher grade than usual.
a.Who would buy insurance and at what price in a competitive equilibrium?
b.Suppose it costs $5 to truthfully signal your type and $10 to falsely signal what type of student you are, and if an insurance company receives no signal, it will interpret this as a signal that you are a B student.What would be the competitive outcome now?
c.Suppose a new teacher comes in -- and this teacher is willing to change a grade for just $60.How does your answer to (a) change?
d.How would your answer to (b) change?
e.Can you change something in the problem that would result in only A-students buying insurance?

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Definitions:

Treasury Bonds

Long-term, fixed-interest securities issued by the U.S. government as a way of borrowing money to fund its operations and projects.

Issue Price

The price at which new shares or bonds are offered to the public by a company or government for the first time.

Yield Per Annum

The annual return on an investment, expressed as a percentage of the total investment.

Retirement Income

Income that an individual receives after retiring from active employment, which can come from pensions, savings, investments, and government benefits.