The market price for the insurance policy in the case of prohibitive costs of identifying each driver's risk characteristics is determined by:
A)the relative skills of the low- risk drivers.
B)the relative size of the high- risk and low- risk groups of drivers.
C)the relative skills of high- risk drivers.
D)the relative size of the group of new drivers.

Question

Quizplus · Accepted Answer

The market price for the insurance policy will be influenced by the relative size of the high-risk and low-risk groups of drivers. If the high-risk group is larger, then insurance companies will have to charge higher premiums to cover their increased risk exposure. If the low-risk group is larger, then insurance companies can charge lower premiums since their risk exposure is lower.

The Market Price for the Insurance Policy in the Case