ch14_solutions_solved edit

ch14_solutions_solved edit - Solutions to Chapter 14...

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Solutions to Chapter 14 Exercises SOLVED EXERCISES S1. Some examples of incentive schemes that help induce more care on the part of policy holders: 1. The insurer can provide a multiyear contract or otherwise establishes an ongoing relationship in which future insurance premiums depend on current outcomes. The premium would decrease after, say, a year of no (or low) claims but would increase after a year of more (or larger) claims. 2. The insurer can provide discounts for observable actions that reduce the risk that the insured- against outcome occurs, for example, installing burglar alarm systems, taking careful-driving courses, and so on. Insurers can also implement practices that help them detect fraud: 1. Insurers can offer rewards to people who observe fraudulent behavior by neighbors or others (for example, reckless drivers) and report it. Companies could get together and set up a Web site, for example, so individuals who observe careless behavior can post the information without having to know which specific insurance company to contact. Such a scheme requires a system for filtering out false reports. 2. Insurers could increase the consequences associated with detected fraud. A firm can, of course, void the contract and not pay anything, but in some countries penalties include criminal prosecution and fines or even jail time. S2. (a) Here are several examples of discounts being offered for larger quantities: (i) A daily newspaper subscription for $20 per month, versus a single copy for $1. (ii) A mobile-phone plan has a larger number of minutes per month, at a lower cost per minute. (iii) A small (100-square-inch) pizza for $12, versus a large (256-square-inch) pizza for $16. (iv) Buy two apples, get the third free. (v) A single drop-in yoga class costs $15, whereas an unlimited monthly pass costs $100. (vi) A 10-pound family pack of chicken breasts costs $0.99 per pound at the supermarket, whereas a regular 2-pound package costs $1.39 per pound. Some quantity discounts involve bundling together different types of products: Solutions to Chapter 14 Solved Exercises 1 of 21
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(vii) Get a printer for $50 (regular price $100) when you buy a computer for $1,000. (viii) Purchase a tour package of flight plus hotel at a lower price than you would pay for the flight and hotel separately. (ix) Purchase Microsoft Excel, Word, and PowerPoint as a bundle for a lower price than the sum of the three individual prices. (x) Purchase a service/repair contract bundled together with your new automobile at a price lower than you would expect to pay if you purchased your repairs later as needed. (xi) Pay an extra fee to have breakfast included with your hotel room, but less than you would pay to purchase breakfast in your hotel restaurant as a separate item. (b) Those who choose a large quantity reveal themselves to be willing to purchase more of the product, with the lower price inducing them to purchase more rather than less. For example, a large family may be willing to purchase a 10-pound package of chicken breast at a discounted per-pound price, because they like chicken enough to be willing to eat it three meals in a row. By contrast, a small family
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ch14_solutions_solved edit - Solutions to Chapter 14...

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