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4n. Individual Problem 20-4 Suppose that every driver faces a 3% prI:|lJal:Iilityr of an automobile accident even; year. An accident I-lrillr on average, cost each
4n. Individual Problem 20-4 Suppose that every driver faces a 3% prI:|lJal:Iilityr of an automobile accident even; year. An accident I-lrillr on average, cost each driver $13,000. Suppose there are two types of individuals: these with $?B,000.00 in the bank and those with $5,500.00 in the bank. Assume thatinclividuals with 56,500.00 in the bank declare bankruptcy it they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse. In this scenario, the actuarially fair price of Full insurance, in which all damages are paid by the insurance company, is . Assume that the price of insurance is set at the actuarial")! fair priue. Atthis priue, drivers with 55,500.00 in the bank liloelv 7 buy insurance, and these with $73,000.00 in the bank liloelv 7 buy insulanue. (Hint: For each type ofdriver, compare the price of insurance to the expected cost without insurance] Suppose a state law has been passed forcing all individuals In purchase insurance at the actuarially fair price. Tn.|e or False: The law will a'i'Fect the behavior at both types ofdriyers. O Tn.|e 0 False
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