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Richie Rich, a millionaire, and Penny Poor, a welfare recipient, are both at high risk for...

Richie Rich, a millionaire, and Penny Poor, a welfare recipient, are both at high risk for automobile accidents. Richie owns a fast sports car, and he likes to drag race with his friends on the weekends. Penny has a small junker that has an extra-powerful engine, which she regularly tests as she speeds to her part time job everyday. Auto liability insurance is not compulsory in their state. Explain why Penny might have less incentive to purchase liability insurance than Richie.

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Expert Solution

Due to following reasons Penny may have less incentive than Richie: -

  1. Frequency of Risk: - As Richie does race at weekends whereas Penny needs to do her job daily that’s why Penny’s chances to get an accident are more than Richie.
  2. Risky Job: - Sports car racing is hobby of Richie whereas in case of Penny it is her job to test speed.
  3. Safety measures: - Sports Car manufacturing company takes all security and safety measures to design the sports car so that driver can be safe whereas no such safety available with Penny.
  4. Condition of vehicle used: -There is huge difference between a sport car and a junked vehicle.
  5. Purpose of vehicle: - Sports cars designed for car racing whereas there is no design prescription for a junk vehicle.

All the above reasons make cost of insurance more to Penny than Richie.

jeff jeffy answered 2 years ago
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