Suppose the market for auto insurance is made of up two types of buyers: high-risk and low-risk. Buyers’ willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined in a photo (a) In a world with perfect information, would the market for insurance plans clear? If not, why? If yes, what are some prices that would a llow both markets to clear? The prices in each market are allowed to differ Assume now that there is asymmetric information and that insurance companies do not know how risky an individual buyer is. In the face of this uncertainty, they determine that the probability that a “walk-in” is high-risk is 0.75. What is the minimum price sellers are willing to accept when selling an
Suppose the market for auto insurance is made of up two types of buyers: high-risk and low-risk.
Buyers’
when selling plans to each type of buyer, are outlined in a photo
(a) In a world with perfect information, would the market for insurance plans clear? If not, why?
If yes, what are some prices that would a llow both markets to clear? The prices in each
market are allowed to differ
Assume now that there is asymmetric information and that insurance companies do not know
how risky an individual buyer is. In the face of this uncertainty, they determine that the probability that a “walk-in” is high-risk is 0.75.
What is the minimum price sellers are willing to accept when selling an
insurance plan? At this price, will low- and high-risk buyers both be willing to purchase this insurance plan? Explain. Be sure the mention adverse selection in your answer.
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