Individual Problems 20-4 Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $5,000. Suppose there are two types of individuals: those with $30,000.00 in the bank and those with $1,000.00 in the bank. Assume that individuals with $1,000.00 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 $1,000.00 in the bank likely will or will not buy insurance, and those with $30,000.00 in the bank likely will or will not 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.
Individual Problems 20-4 Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $5,000. Suppose there are two types of individuals: those with $30,000.00 in the bank and those with $1,000.00 in the bank. Assume that individuals with $1,000.00 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 $1,000.00 in the bank likely will or will not buy insurance, and those with $30,000.00 in the bank likely will or will not 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.
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
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Transcribed Image Text:Individual Problems 20-4
Suppose that every driver faces a 2% probability of an
automobile accident every year. An accident will, on
average, cost each driver $5,000. Suppose there are two
types of individuals: those with $30,000.00 in the bank
and those with $1,000.00 in the bank. Assume that
individuals with $1,000.00 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 $1,000.00 in the bank likely will
or will not buy insurance, and those with $30,000.00 in
the bank likely will or will not 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.
False
True
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