Who will get insured and what will the premiums be

Reference no: EM133341625

Question: There are two kinds of consumers who are looking to buy auto insurance from an insurance firm - Reckless drivers (R) and Safe Drivers (S). 50 percent of the consumer population is R and 50 percent is S. The insurance company's cost of servicing a consumer is $80 if she is a safe driver and $120 if she is a reckless driver. The value of the insurance is $100 to S and $150 to R. Observable Types Suppose the insurance company can observe whether a consumer is reckless or safe.

a) Who will get insured and what will the premiums be?

b) What are the profits to the insurance company?

c) Is this outcome efficient?

Reference no: EM133341625

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