By offering a menu of policies with different premiums and deductibles, insuranc

Question

By offering a menu of policies with different premiums and deductibles, insurance companies can _____ their customers; for example, a low-risk customer will often buy insurance with a lower _____ but a higher _____ than a high-risk customer.

A. signal; deductible; premium

B. signal; premium; deductible

C. screen; deductible; premium

D. screen; premium; deductible

Suppose you are asked to evaluate a project in which you will receive $1,000 one year from now, receive $2,000 two years from now, and incur costs of $400 now. What is the net present value of this project if the interest rate is 10%?

A. $2,327.27

B. $2,561.98

C. $2,161.98

D. $2,600

Explanation / Answer

By offering a menu of policies with different premiums and deductibles, insurance companies can SCREEN their customers; for example, a low-risk customer will often buy insurance with a lower PREMIUM but a higher _DEDUCTIBLE than a high-risk customer.

D. screen; premium; deductible

Suppose you are asked to evaluate a project in which you will receive $1,000 one year from now, receive $2,000 two years from now, and incur costs of $400 now. What is the net present value of this project if the interest rate is 10%?

Net Present Value = 1000/(1.1) + 2000/ (1.1)2 - 400 = 2161.98

C. $2161.98

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