Suppose that every driver faces a 3% probability of an automobile accident every year. An accident will, on average, cost each driver $8,000. Suppose there are two types of individuals: those with $40,000.00 in the bank and those with $4,000.00 in the bank. Assume that individuals with $4,000.00 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 5 Assume that the price of insurance is set at the actuarially fair price. At this price, drivers with $4,000.00 in the bank likely buy insurance, and those with $40,000.00 in the bank likely 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. buy False True

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
4. Individual Problems 20-4
Suppose that every driver faces a 3% probability of an automobile accident every year. An accident will, on average, cost each driver $8,000. Suppose
there are two types of individuals: those with $40,000.00 in the bank and those with $4,000.00 in the bank. Assume that individuals with $4,000.00
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 $4,000.00 in the bank likely
buy insurance, and those with $40,000.00 in the bank likely
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
buy
Transcribed Image Text:4. Individual Problems 20-4 Suppose that every driver faces a 3% probability of an automobile accident every year. An accident will, on average, cost each driver $8,000. Suppose there are two types of individuals: those with $40,000.00 in the bank and those with $4,000.00 in the bank. Assume that individuals with $4,000.00 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 $4,000.00 in the bank likely buy insurance, and those with $40,000.00 in the bank likely 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 buy
Expert Solution
steps

Step by step

Solved in 4 steps with 4 images

Blurred answer
Knowledge Booster
Risk Aversion
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education