Suppose every driver faces a 1% probability of an automobile accident every year. An accident will,...

Suppose every driver faces a 1% probability of an automobile accident every year. An accident will, on an average cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 and those with $5,000 in the bank. Assume that individuals with $5,000 in the bank declare bankruptcy if they get in an accident. In the bankruptcy, creditors receive only what individuals have in the bank. What price are individuals with $5,000 in the bank willing to pay for the insurance? Will those with $5,000 in the bank voluntarily purchase insurance? (Remember that there are state laws forcing individuals to purchase auto liability insurance.) What is the expected cost of the insurance company of insuring the automobile? 100

Q17. In event of an accident, what will be the total loss of individuals with $60,000 in the bank if they don’t buy insurance? (600 is a wrong answer)

Q18. In event of an accident, what will be the total loss of individuals with $5,000 in the bank if they don’t buy insurance? (50 is a wrong answer)

(please just answer 17&18)

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orchestra answered 1 year ago

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