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?