Suppose There Exists Only One Type of Auto- Insurance Policy

question 68

Multiple Choice

Suppose there exists only one type of auto- insurance policy, and that all the individuals are
Risk- averse. Seventy- five percent of the population consists of low- risk individuals, each of whom has a 10% chance of being in a car accident that causes $5,000 worth of damage. The remainder of the population has a 60% chance of being in such an accident. Given a competitive insurance market consisting of risk- neutral firms that incur no operating expenses, what will be the equilibrium price for full coverage?

• A)$525
• B)$1,125
• C)Either $3,000, or $1,125
• D)$3,000

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Definitions:

Comprehensive Income

The overall adjustment in equity during a reporting period, apart from dealings with owners, incorporating every unrealized gain and loss.

Conceptual Framework

A system of ideas and objectives that guide the development, preparation, and interpretation of financial reporting and accounting standards.

Recognition and Measurement

The principles that determine the timing and amount at which elements of financial statements are recorded.

Elements

Fundamental components or constituents of something, often referred to in the context of abstract concepts, compounds, or a set of parts.