1. Philadelphia has relatively high prices for car insurance because ________cause ________and ________causes ________.
2. In the market for crop insurance________, -risk farmers buy insurance in greater numbers, meaning that the market experiences ________.
3. Car insurance increases traffic ________because insured drivers ________.
4. Mandatory Insurance. Consider a city with 100 drivers and a perfectly competitive market for automobile insurance. The demand curve for auto insurance is linear and negatively sloped, with a slope of $10 per customer. At the initial price of $1,500, half the city s drivers (50 drivers) buy insurance. The price is just high enough to cover all the costs of providing insurance, including a 50 percent premium to cover the costs associated with uninsured drivers. Suppose the city makes auto insurance mandatory. Predict the new equilibrium.
5. Crop Insurance. Consider a state in which farmers are divided equally into two types: high risk and low risk. The average annual crop loss (and possible insurance claim) is $200 for a low-risk farmer and $1,200 for a high-risk farmer.
a. If all farmers were to buy insurance, what is the break-even price for the insurance company?
b. Suppose a farmer will purchase insurance only if the price (the annual premium) is no more than 50 percent higher than his or her average crop loss. What is the equilibrium price?
6. Safety Rebate from the Insurance Company. In 2010 a leading insurance company started a policy that pays a policy holder a 5 percent rebate on his or her insurance premium in any year in which the driver does not file an insurance claim. For example, a household with an annual premium of $1,200 will get a $60 rebate check each year it does not file a claim. Explain the rationale for the rebate policy. What problem is the policy trying to solve?