What is the actuarially fair price of insurance

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Reference no: EM13202548

Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will on average cost each driver $10,000. Suppose there are 2 types of individuals:those w/$60,000 in the bank and those with $5000 in the bank. Assume that individuals w/$5000 in the bank declare bankruptcy if they get in a an accident. In bankruptcy, creditors receive only what individuals have in the bank.

1. What is the actuarially fair price of insurance?

2.What price are individuals w/$5000 in the bank willing to pay for the insurance?

3. Will those w/$5000 in the bank voluntarily purchase insurance?

Reference no: EM13202548

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