There are 200 people of two types on the road: good drivers and bad drivers. Good...

There are 200 people of two types on the road: good drivers and bad drivers. Good drivers (G) have a 1% chance of causing an accident while bad drivers (B) have a 5% chance of causing an accident. The proportion of bad drivers is 0.5, so the proportion of good drivers is 0.5. The cost of an accident is $6,000. Good drivers have a willingness to pay for insurance of $200 while bad drivers have a willingness to pay of $400.

b. Now suppose that the insurance company does not know the driver’s type. What would the insurance company’s expected profit be if it charged premiums based on the individual’s self-reported type?

PLEASE EXPLAIN WHAT -ve IS

c. Now suppose that the insurance company does not know the driver’s type. What premiums would the insurance company charge if they did not have any information on the driver’s type? Is there a pooling equilibrium?

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Rahul Sunny answered 1 year ago

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There are 200 people of two types on the road: good drivers and bad drivers. Good...

Solutions

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