As the owner of a company that specializes in writing car insurance, you know that 10% of the drivers you insure will get into an accident in the next year and that each accident will cost the company $5,000. The other 90% will not get into an accident. To simplify the analysis, you can assume in this problem that you are only interested in covering the costs of running your business. a) If you know exactly who among your customers will get into an accident during the year, how much will you charge each type (i.e. those drivers that will get into an accident and those that will not)?

b) If neither you nor the drivers know which 10% will get into an accident, how much will you charge each customer type? Assuming they value the security and certainty that car insurance provides, will they pay the premium?

c) If your customers know whether they will get into an accident, but you do not, explain what will happen if you try to charge the premium you recommended in part b). Using the concepts discussed during our class session, of what is this an example?

d) Explain how screening could be used to solve the type of problem you described in part c).