Question

In: Economics

There are two types of drivers on the road today, Speed Racers with a 5% chance...

There are two types of drivers on the road today, Speed Racers with a 5% chance of an accident per year, and Low Riders with a 1% change per year. There are an equal number of Speed Racers and Low Riders. The cost of an accident is $12,000.

a. Suppose an insurance company knows with perfect information each person’s type. What premium would they charge each type?

b. Now suppose there is asymmetric information, so the insurance company doesn’t know each driver’s type, would insurance be sold if:

1) Drivers self report their types to the company?

2) No information is known about types? If you are not sure about the answer, say why.

Solutions

Expert Solution

Please upvote sir...

Rahul Sunny answered 1 year ago
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