Given a risk- averse individual and a competitive insurance market in which firms are risk- neutral and incur no operating costs, it can be concluded that an individual's reservation price for
Full- insurance coverage:
A)is greater than that of an insurance company.
B)is less than that of an insurance company.
C)precludes a viable market for insurance.
D)is equal to that of an insurance company.

Question

Quizplus · Accepted Answer

In a competitive insurance market, a risk-averse individual values full insurance coverage more than a risk-neutral insurance company because the individual is willing to pay a premium to avoid the uncertainty of loss, whereas the insurance company, being risk-neutral and incurring no operating costs, values the coverage based on the expected loss. Therefore, the individual's reservation price is higher.

Given a Risk- Averse Individual and a Competitive Insurance Market