In the market for auto insurance,with a pooling equilibrium ________ and with a separating equilibrium ________.
A) aggressive drivers pay a higher premium than do safer drivers; aggressive drivers pay a higher premium than do safer drivers
B) no one can buy auto insurance; aggressive drivers pay a higher premium than do safer drivers
C) aggressive and safe drivers pay the same premium; aggressive and safe drivers pay the same premium
D) aggressive and safe drivers pay the same premium; aggressive drivers pay a higher premium than do safer drivers
E) aggressive drivers pay a higher premium than do safer drivers; aggressive and safe drivers pay the same premium

Question

Quizplus · Accepted Answer

In a pooling equilibrium, all drivers pay the same premium regardless of their risk level. This is because insurance companies do not have enough information to separate drivers into different risk categories. In a separating equilibrium, insurance companies can gather enough information to separate drivers into different risk categories and charge different premiums accordingly. Therefore, in a separating equilibrium, aggressive drivers will likely pay a higher premium than safer drivers. Hence, the correct option is D.

In the Market for Auto Insurance,with a Pooling Equilibrium ________