The acme auto insurance company

The Acme Auto Insurance Company is risk neutral and seeks to offer insurance at its
actuarially fair price. All drivers in the community have the same initial income, $400, and know that if they are involved in an auto accident, their income falls to $0.
All drivers have the same von Neumann-Morgenstern utility index: U(Y) = Y½
There are two groups of drivers in the community. One half are safe drivers and face a 25% chance of being in the accident. The others are risky drivers and face a 75% chance of being in an accident.

a) If the insurance company can identify who is a safe driver and who is a risky driver and charge them different prices, what premium will members of each group pay for insurance? How much insurance will a representative driver in each group buy? What level of income will each type of driver enjoy in the two states of the world?

b) Now assume that while each individual knows whether she is a safe or risky driver, the insurance company does not. Acme only knows that overall there is a 50% chance of an individual being in an accident, so it charges $0.50 per $1 of coverage to everyone. Solve for the optimal decision for each type of driver. You may assume that there is no limit on the amount of insurance an individual can buy. Is the insurance company in long run equilibrium at this price? [Hint: what is Acme’s expected profit per driver?] Explain
briefly what is going on in this case.

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more