Driver faces probability of an automobile accident

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Assume that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Assume there are two types of individuals: those with $60,000 in the bank as well as those with $5,000 in the bank. Assume that individuals with $5,000 declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. What is the actuarially fair cost of insurance? What cost 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?

Reference no: EM137597

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