Assume there are two groups of consumers. Both sets of consumers are risk-averse. Consumers know their risk type throughout this problem. 1. Group 1 is "careless" and has a 5% chance of getting into a $30,000 accident. There are 100 people in group 1. 2. Group 2 is "careful" and has a 0.5% chance of getting into a $30,000 accident. There are 100 people in group 2. Imagine an insurance company is considering selling policies, and the market is competitive. Further, assume information is asymmetric. In this scenario, even with asymmetric information, assume the insurance company offered actuarially fair premiums to each group. What is the insurance company's expected profit?
Assume there are two groups of consumers. Both sets of consumers are risk-averse. Consumers know their risk type throughout this problem. 1. Group 1 is "careless" and has a 5% chance of getting into a $30,000 accident. There are 100 people in group 1. 2. Group 2 is "careful" and has a 0.5% chance of getting into a $30,000 accident. There are 100 people in group 2. Imagine an insurance company is considering selling policies, and the market is competitive. Further, assume information is asymmetric. In this scenario, even with asymmetric information, assume the insurance company offered actuarially fair premiums to each group. What is the insurance company's expected profit?
Chapter1: Making Economics Decisions
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Question 28
Assume there are two groups of consumers. Both sets of consumers are risk-averse.
Consumers know their risk type throughout this problem.
1. Group 1 is "careless" and has a 5% chance of getting into a $30,000 accident. There are
100 people in group 1.
2. Group 2 is "careful" and has a 0.5% chance of getting into a $30,000 accident. There are
100 people in group 2.
Imagine an insurance company is considering selling policies, and the market is competitive.
Further, assume information is asymmetric.
In this scenario, even with asymmetric information, assume the insurance company offered
actuarially fair premiums to each group. What is the insurance company's expected profit?
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