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8 . Individual Problems 20-4Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $8,000. Suppose there are two types of individuals: those with $64,000.00 in the bank and those with $2,000.00 in the bank. Assume that individuals with $2,000.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse.
In this scenario, the actuarially fair price of full insurance, in which all damages are paid by the insurance company, is.___?____
At this price, drivers with $2,000.00 in the bank likely
will or will not
buy insurance, and those with $64,000.00 in the bank likely wii
or will not
buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.)Suppose a state law has been passed forcing all individuals to purchase insurance at the actuarially fair price.
False or True?
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