The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a pooling equilibrium,there ________ a deadweight loss in the market for safe drivers,and there ________ a deadweight loss in the market for aggressive drivers.
A) is; is
B) is; is not
C) is not; is
D) is not; is not
E) might be; might be

Question

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a pooling equilibrium,there ________ a deadweight loss in the market for safe drivers,and there ________ a deadweight loss in the market for aggressive drivers.
A) is; is 
B) is; is not 
C) is not; is 
D) is not; is not 
E) might be; might be

Quizplus · Accepted Answer

In a pooling equilibrium, information asymmetry leads to a situation where insurers cannot perfectly distinguish between safe and aggressive drivers. As a result, they charge a premium that reflects an average risk. This causes a deadweight loss in both markets: safe drivers pay more than their fair share, leading some to exit the market, while aggressive drivers pay less than their fair share, encouraging riskier behavior.

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