24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of buyer they are insuring, what is the minimum equilibrium price of insurance? a. $1,000 b. $1,500 c. $2,000 d. $3,000 e. $4,000
24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of buyer they are insuring, what is the minimum equilibrium price of insurance? a. $1,000 b. $1,500 c. $2,000 d. $3,000 e. $4,000
Chapter14: Transaction Costs, Asymmetric Information, And Behavioral Economics
Section: Chapter Questions
Problem 3.8P
Related questions
Question
![24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance
companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are
risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of
insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of
buyer they are insuring, what is the minimum equilibrium price of insurance?
a. $1,000
b. $1,500
c. $2,000
d. $3,000
e. $4,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F403e16cb-4b61-41d4-bd49-0035795357c3%2F91611d79-22cf-416d-be62-fb12408639b9%2Fpuqppg7l_processed.jpeg&w=3840&q=75)
Transcribed Image Text:24. Consider adverse selection in the car insurance market. Drivers are either risky or safe. The insurance
companies cannot distinguish between the two types of drivers, but they know that 50% of all drivers are
risky. Insuring a risky driver costs $3,000, while insuring a safe driver costs $1,000. The benefits of
insurance is $4,000 for a risky driver and $1,500 for a safe driver. If insurers cannot observe the type of
buyer they are insuring, what is the minimum equilibrium price of insurance?
a. $1,000
b. $1,500
c. $2,000
d. $3,000
e. $4,000
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