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ABC explosives has purchased re insurance for its factory. It can institute a re prevention program, which would cost $90, but which would lower the probability of a re from .01 to .001. The insurance company cannot determine whether ABC has instituted the program. However, it charges a deductible in the event of a re (i.e. ABC has to pay a certain amount to the insurance company if a reoccurs).

a. What problem discussed in class is the insurance company worried about in charging a deductible?

b. What is the smallest deductible that will incentivize ABC to institute the re prevention program?

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9685083

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