3 A Firm Offers Theft Insurance For Bicycles For 90 This Insurance Covers The Cost Of A Replacement Bike That Costs 1 (25.78 KiB) Viewed 27 times
3 A Firm Offers Theft Insurance For Bicycles For 90 This Insurance Covers The Cost Of A Replacement Bike That Costs 2 (28.57 KiB) Viewed 27 times
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.
(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; ii. and to prefer to be careful to being careless. [4 marks] [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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