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Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $30,000. Suppose there
- Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $30,000. Suppose there are two types of individuals: those with $100,000 in the bank and those with $10,000 in the bank. Assume that individuals with $10,000 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 $10,000 in the bank willing to pay for the insurance? Will those with $10,000 in the bank voluntarily purchase insurance?
- What is the effect of state laws forcing individuals to purchase auto liability insurance?
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