Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose that every driver faces a 4% probability of an automobile accident every year. An accident will, on average, cost each driver $11,000. Suppose there

image text in transcribed Suppose that every driver faces a 4% probability of an automobile accident every year. An accident will, on average, cost each driver $11,000. Suppose there are two types of individuals: those with $55,000.00 in the bank and those with $2,750.00 in the bank. Assume that individuals with $2,750.00 in the bank declare bankruptcy if 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 actuarially fair price. At this price, drivers with $55,000.00 in the bank likely buy insurance, and those with $2,750.00 in the bank likely buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.) Suppose a state law has been passed forcing all individuals to purchase insurance at the actuarially fair price. True or False: The law will affect the behavior of both types of drivers. True False

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Trade Finance

Authors: Tarsem Bhogal, Arun Trivedi

2nd Edition

303024542X, 9783030245429

More Books

Students also viewed these Finance questions

Question

The cruise industry will continue to expand.

Answered: 1 week ago