6. Suppose that there are two types of drivers: reckless and safe. Reckless drivershave a higher probability of accidents with an expected loss to the insurancecompany of $5000. Safe drivers have a lower probability of accidents with anexpected loss to the insurance company of $1000. Insurer cannot distinguishbetween reckless and safe drivers but know that reckless drivers make up "B"proportion of all drivers. What single premium should the risk-neutral insurercharge? Assume that the insurance market is perfectly competitive. Is the abovementioned problem an example of Adverse Selection or Moral Hazard? Explain.

Insurance is a policy, addressed by an approach, where an individual or element gets monetary…

mpany of 5000. Safe drivers have a lower probability of accidents with óf $: áfé dřivers have a lower prob pected loss to the insurance company of $1000. Insurer cannot distingui ween reckless and safe drivers but know that reckless drivers make up oportion of all drivers. What single premium should the risk-neutral insu arge? Assume that the insurance market is perfectly competitive. Is the entioned problem an example of Adverse Selection or Moral Hazard? E>

mpany of 5000. Safe drivers have a lower probability of accidents with óf $: áfé dřivers have a lower prob pected loss to the insurance company of $1000. Insurer cannot distingui ween reckless and safe drivers but know that reckless drivers make up oportion of all drivers. What single premium should the risk-neutral insu arge? Assume that the insurance market is perfectly competitive. Is the entioned problem an example of Adverse Selection or Moral Hazard? E>

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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