Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 7

Suppose that, in problem, two drivers are very careful and three are reckless. The "average" premium set by the insurance company will look relatively unat­tractive to the _______ drivers and will look like a good deal to the ________ drivers.
A) Careful; reckless
B) Reckless; careful
C) The average premium will look like a good deal to both careful and reckless drivers.
D) The average premium will look relatively unat­tractive to both careful and reckless drivers.
Problem
A car insurance company has five customers who have taken out policies against auto damage. The drivers are all alike. On average, each year, two customers will file claims with the company, and the average payout made by the company will be $5,000 per claim. In order to break even, the insurance company needs to charge each of its customers an annual premium of _________.
A) $5,000
B) $2,000
C) $10,000
D) $1,000