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There are two kinds of consumers who are looking to buy auto insurance from an insurance firm

 There are two kinds of consumers who are looking to buy auto insurance from an insurance firm - Reckless drivers (R) and Safe Drivers (S). 50 percent of the consumer population is R and 50 percent is S. The insurance company's cost of servicing a consumer is $80 if she is a safe driver and $120 if she is a reckless driver. The value of the insurance is $100 to S and $150 to R. Observable Types Suppose the insurance company can observe whether a consumer is reckless or safe? a) Who will get insured and what will the premiums be? b) What are the profits to the employer? c) Is this outcome efficient? Unobservable Types d) Now suppose the firm cannot distinguish between reckless and safe drivers. e) If the firm continues to offer the same premiums derived in part a) who will accept the insurance and what premium will they pay? 1) What is the expected profit to the firm from offering these premiums? g) What will the profit maximizing premium be for the insurance company? Who will buy the insurance at this equilibrium? h) Is this market equilibrium efficient?

Feb 07 2020 View more View Less

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