- 3 A Firm Offers Theft Insurance For Bicycles For 90 This Insurance Covers The Cost Of A Replacement Bike That Costs 1 (70.37 KiB) Viewed 43 times
3. A firm offers theft insurance for bicycles for $90. This insurance covers the cost of a replacement bike that costs $
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3. A firm offers theft insurance for bicycles for $90. This insurance covers the cost of a replacement bike that costs $
3. A firm offers theft insurance for bicycles for $90. This insurance covers the cost of a replacement bike that costs $500 in case the bicycle gets stolen. If an agent is careful, then she has a 10% of her bike getting stolen. If an agent is careless, then she has a 40% chance of her bike getting stolen. It costs her effort worth $60 to be careful. (a) Suppose that there is no insurance. Will the agent be careful? [3 marks] (b) Suppose that she buys the insurance, will she be careful or not? [3 marks] (c) Will she buy the insurance [4 marks) (d) Suppose that the firm offers a contract with a price p and a deductible d. Write down the necessary equations for the agent to i. prefer the insurance with a deductible to no insurance; [4 marks) ii. and to prefer to be careful to being careless. [4 marks] (e) Now what is the minimum deductible so that the agent will be careful? With this deductible, what is the highest price the firm can charge [8 marks]
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