Past exam papers Essay Example | Topics and Well Written Essays - 750 words

Past exam papers - Essay Example As such, amount of firm effort is determined by market, not an entrepreneur. The market determines the level of effort needed in an enterprise and, therefore, the quality and determination of the person operating a business is affected by the effort observed. If the entrepreneur realizes that putting much effort will result into more output, then they will design a manager contract that requires the manager to be energetic and put more effort. If the effort is not much needed, then the entrepreneur will design the contract, which puts less pressure on the manager. a) Fair insurance has zero net payoff, that is, the total amount of premium, which is paid by the client, is equated to the expected value of compensation that would be received. A full insurance pays compensates the insured with a payment that is equal to the harm which is caused by the risk insured against, that is, it leaves the insured as well off as they would have been if the risk insured against did not occur. b) Full and fair insurance is given only in the event that the insured knows the degree of their risk. Both low and high-risk person knows whether the insurance is fair by comparing the level of their risk with the premium charged and the amount of compensation expected. c) Equilibrium occurs when the insured person and the insurance companies have the same information regarding the risk to be insured. When an insurance company fully understand the extent to which the client is exposed to the risk and the insured understands the extent to which the insurance company will cover him/her if the risk occurs. a) The EUT holds that after satisfaction of certain axioms, the subjected value that is associated with the gamble will be equal to the expected outcome valuation. The independence axiom regards well defined preferences and makes the assumption that when two gambles are