The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a separating equilibrium,aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________.
A) $1,000; $1,000
B) $800; $1,200
C) $1,200; $800
D) $1,000; $800
E) $1,200; $1,000

Question

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a separating equilibrium,aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________.
A) $1,000; $1,000 
B) $800; $1,200 
C) $1,200; $800 
D) $1,000; $800 
E) $1,200; $1,000

Quizplus · Accepted Answer

A separating equilibrium is one in which the two types of customers can be separated into two different markets with different prices. In this case, the safe drivers would prefer to pay a lower premium and the aggressive drivers would be willing to pay a higher premium. Therefore, the aggressive drivers would pay a premium of $1,200 and the safe drivers would pay a premium of $800. Choice C is the only option that matches this description.

The Figures Show Two Auto Insurance Markets, One Market for Safe