The Minister of Transport released its Festive season road accident statistics which shows that the probability of drivers committing an accident is 8% with utility U(H) = √H, where H stands for year income. The Minister further claims these Festive season road accidents cost the state (in terms of claims lodged) an average of R84 000 per annum. The Road Accident Fund is an insurance scheme providing compulsory indemnity cover to victims of vehicle accidents and taxi drivers. (a) Suppose that an average commuter earns R84 000 per annum. What is the expected utility of each commuter if the driver decides not to take insurance. (b) What is the cost of insurance policy to the Road Accident Fund? (c) Due to high accident rates during Festive season, the road accident fund has issued a warning to the government that the fund will be insolvent soon. Advise the Minister on the cost of insurance that can collapse the scheme
The Minister of Transport released its Festive season road accident statistics which shows that the probability of drivers committing an accident is 8% with utility U(H) = √H, where H stands for year income. The Minister further claims these Festive season road accidents cost the state (in terms of claims lodged) an average of R84 000 per annum. The Road Accident Fund is an insurance scheme providing compulsory indemnity cover to victims of vehicle accidents and taxi drivers.
(a) Suppose that an average commuter earns R84 000 per annum. What is the expected utility of each commuter if the driver decides not to take insurance.
(b) What is the cost of insurance policy to the Road Accident Fund?
(c) Due to high accident rates during Festive season, the road accident fund has issued a warning to the government that the fund will be insolvent soon. Advise the Minister on the cost of insurance that can collapse the scheme
Step by step
Solved in 4 steps
