Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $7,000. Suppose there are two types of individuals: those with $42,000.00 in the bank and those with $1,750.00 in the bank. Assume that individuals with $1,750.00 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 $42,000.00 in the bank likely buy insurance, and those with $1,750.00 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 aill individuals to purchase insurance at the actuarially fair price. True or False: The law will affect only the behavior of drivers with $1,750.00 in the bank. O True O False

Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $7,000. Suppose there are two types of individuals: those with $42,000.00 in the bank and those with $1,750.00 in the bank. Assume that individuals with $1,750.00 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 $42,000.00 in the bank likely buy insurance, and those with $1,750.00 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 aill individuals to purchase insurance at the actuarially fair price. True or False: The law will affect only the behavior of drivers with $1,750.00 in the bank. O True O False

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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Question

Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $7,000. Suppose
there are two types of individuals: those with $42,000.00 in the bank and those with $1,750.00 in the bank. Assume that individuals with $1,750.00
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 $42,000.00 in the bank likely
v buy insurance, and those with $1,750.00 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 only the behavior of drivers with $1,750.00 in the bank.
O True
O False

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