24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of buyer they are insuring, what is the minimum equilibrium price of insurance? a. $1,000 b. $1,500 c. $2,000 d. $3,000 e. $4,000

24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of buyer they are insuring, what is the minimum equilibrium price of insurance? a. $1,000 b. $1,500 c. $2,000 d. $3,000 e. $4,000

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

See similar textbooks

Similar questions

How might adverse selection make it difficult for an insurance market to operate?
In an insurance system, would you expect each person to receive in benefits pretty much what they pay in premiums or is it just that the average benefits paid will equal the average premiums paid?
How can moral hazard lead to more costly insurance premiums than one was expected?
What are some ways a seller of labor (that is, someone looking for a job) might reassure a possible employer who is faced with imperfect information?
How can deductibles, copayments, and coinsurance reduce moral hazard?
A9 Describe an example of adverse selection that we may run into in the real world. How does adverse selection impact the policy holders for this specific type of insurance for: High risk participants? Low risk participants? What is one government regulation that has been enacted in the last 20 years that helps either high risk or low risk policy holders in the United States
18.5 Suppose there is a 50–50 chance that an individual with log- arithmic utility from wealth and with a current wealth of $20,000 will suffer a loss of $10,000 from a car accident. Insur- ance is competitively provided at actuarially fair rates. Compute the outcome if the individual buys full insurance. Compute the outcome if the individual buys only partial insurance covering half the loss. Show that the outcome in part (a) is preferred. Now suppose that individuals who buy the partial rather than the full insurance policy take more care when driv- ing, reducing the damage from loss from $10,000 to $7,000. What would be the actuarially fair price of the partial policy? Does the individual now prefer the full or the partial policy?