In the market for auto insurance,in a separating equilibrium,
A) risky and safe drivers pay the same premium for insurance.
B) risky drivers pay a larger premium than do safe drivers for insurance.
C) risky drivers pay a smaller premium than do safe drivers for insurance.
D) risky drivers cannot obtain insurance.
E) safe drivers cannot obtain insurance.

Question

Quizplus · Accepted Answer

In a separating equilibrium, the insurance company is able to distinguish between risky and safe drivers and charges a higher premium to risky drivers and a lower premium to safe drivers. This is because the company wants to avoid adverse selection and only insure those who are less likely to make claims. As a result, option B is the correct answer.

In the Market for Auto Insurance,in a Separating Equilibrium