mpany of 5000. Safe drivers have a lower probability of accidents with óf $: áfé dřivers have a lower prob pected loss to the insurance company of $1000. Insurer cannot distingui ween reckless and safe drivers but know that reckless drivers make up oportion of all drivers. What single premium should the risk-neutral insu arge? Assume that the insurance market is perfectly competitive. Is the entioned problem an example of Adverse Selection or Moral Hazard? E>

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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6. Suppose that there are two types of drivers: reckless and safe. Reckless drivers
have a higher probability of accidents with an expected loss to the insurance
company of $5000. Safe drivers have a lower probability of accidents with an
expected loss to the insurance company of $1000. Insurer cannot distinguish
between reckless and safe drivers but know that reckless drivers make up "B"
proportion of all drivers. What single premium should the risk-neutral insurer
charge? Assume that the insurance market is perfectly competitive. Is the above
mentioned problem an example of Adverse Selection or Moral Hazard? Explain.
Transcribed Image Text:6. Suppose that there are two types of drivers: reckless and safe. Reckless drivers have a higher probability of accidents with an expected loss to the insurance company of $5000. Safe drivers have a lower probability of accidents with an expected loss to the insurance company of $1000. Insurer cannot distinguish between reckless and safe drivers but know that reckless drivers make up "B" proportion of all drivers. What single premium should the risk-neutral insurer charge? Assume that the insurance market is perfectly competitive. Is the above mentioned problem an example of Adverse Selection or Moral Hazard? Explain.
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