Question: Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there

Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 in the bank and those with $5,000 in the bank. Assume that individuals with $5,000 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. What is the actuarially fair price of insurance? What price are individuals with $5,000 in the bank willing to pay for the insurance? Will those with $5,000 in the bank voluntarily purchase insurance?

Step by Step Solution

★★★★★

3.38 Rating (164 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

The actuarially fair price of insurance is 110000100 Indiv... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

90-B-E-M-E (408).docx

120 KBs Word File

Students Have Also Explored These Related Economics Questions!

There are two types of electric pencil-sharpener producers. High-quality manufacturers produce very good sharpeners that consumers value at $14. Low-quality manufacturers produce less good ones that...

In a factory there are two types of damages. It is found that 6% of damages are due to transformer damage, 7% are due to line damage and 2% involve both problems. (a) Are the two types of damages...

In the town of Oz, there are two types of tennis players: wizards and imps. Wizards and imps do not socialize, so it would be impossible to start a tennis club that both types would join. Imps have...

17-4. Auto Insurance Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of...

8 . Individual Problems 20-4 Suppose that every driver faces a 3% probability of an automobile accident every year. An accident will, on average, cost each driver $6,000. Suppose there are two types...

14-3 Selling Salsa Your family business produces a secret recipe salsa and distributes it through both smaller specialty stores and chain supermarkets. The chains have been demanding sizable...

1.Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is...

A textbook example of moral hazard is students working together on exams. Given the nature of the flex program, . C.S. Lewis, the famous Irish author (e.g., The Chronicles of Narnia) wrote, Integrity...

com/staticb/ui/evo/index.html?deploymentid=5796251885001781434293041195&elSBN=978133.. Q Make Money Onlin.. Make Money Onlin... Jared - Diamonds.. 20 Apps That Mak.. Top 10 Moneymak. CENGAGE |...

7 . Individual Problems 19-6 You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't...

The financial statements present a company to the public in financial terms. (1) Which financial statement identifies where cash was generated and where it was spent during the year? (2) Identify the...

Imagine you get a $450,000 closed floating rate mortgage (no CMHC needed) having a three-year term and amortized over 25 years. Although the interest rate on the mortgage would change, your monthly...

Litigation can be expensive for companies or organizations. True False

Why is monetary policy not neutral in the New Keynesian model? What are the effects of a change in the central banks target interest rate?

What are the effects of an increase in the world real interest rate on output, absorption, and the current account surplus?

Suppose a search economy with the possibility of double coincidences; that is, assume that when an agent produces a good, that she cannot consume it herself. In a random match where two agents meet...

How does the exchange rate regime matter for stabilization policy in the New Keynesian model?

Why dont real-world central banks want to follow the Friedman rule?

Describe the role of a budget director.

A bank has $110 million in deposits and holds $10 million in vault cash. a. If the required reserves ratio is 10 percent, what dollar amount of reserves must be held at the Federal Reserve Bank? b....

Classify the following financial instruments as money market securities or capital market securities: a. Bankers Acceptances b. Commercial Paper c. Common Stock d. Corporate Bonds e. Mortgages f....

Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs: Quantity of houses painted per month: 1 2 3 4 5 6 7 8 Variable costs: $10, $20, $40,...

QUESTION 1 Davi currently has $ 1 0 , 0 0 0 saved for a new car that she plans to buy for $ 4 0 , 0 0 0 in 3 years. She believes she can earn an annual return of 6 . 3 6 percent. How much does Davi...

A 15-year maturity bond with face value of $1,000 makes semiannual coupon payments and has a coupon rate of 6%. (a) What is the bonds yield to maturity if the bond is selling for $1,110? Round your...

Lui Coffee Company roasts and packs coffee beans. The process begins by placing coffee beans into the Roasting Department. From the Roasting Department, coffee beans are then transferred to the...