1- Give an example case of imperfect information in an economic setting. Explain clearly the reason and consequence of imperfect information in addition to the reason why this situation is counted as imperfect information.
2- What is market failure? Explain in a few sentences.
3- What can be done to decrease or eliminate the effects of imperfect information in economic markets/situations? Give two specific examples.
4- Suppose Firm ABC is selling health insurance for 5 year periods. The insurance covers the costs of medical treatment which happens with probability 0.05 , half of the costs of medical examination which happens with probability 0.15 and 25% of costs of surgery which happens with probability 0.01 in one year. Medical examination costs 10000 dollars, medical treatment costs 20000 dollars and surgery costs 100000 dollars on average.
a. Calculate the expected payment of the company for the next five years.
b. What is the actuarily fair premium per person if Firm ABC has 400 customers?
5- Suppose Firm XYZ is selling car insurance for 1 year. The insurance covers the costs of accident which happens with probability 0.01 and 50% of costs of periodic service examination which happens 4 times in a year on average. An accident costs 30000 dollars and periodic service examination costs 2000 dollars on average.
a. Calculate the expected payment of the company for a year.
b. What is the actuarily fair premium per person if Firm ABC has 500 customers?
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