For an auto insurance company, the average cost of collision claims is $500 per year for...

For an auto insurance company, the average cost of collision claims is $500 per year for careful drivers and $3000 per year for poor drivers. The drivers are risk neutral and know whether they are careful or poor, but the insurance company only knows that 15% of drivers are poor. What is the insurance company's breakeven price for the collision insurance? A. $425 per year B. $450 per year C. $875 per year D. $2,625 per year

Expert Solution

Ans: $875 per year

Explanation:

The insurance company only knows that 15% of drivers are poor means 85% drivers are careful.

The insurance company's breakeven price for the collision insurance = (0.15 * 3,000) + (0.85 * 500)

= $450 + $425

= $875

Rahul Sunny answered 3 years ago

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