Suppose That There Are Two Regions of a State,one Where

question 33

Essay

Suppose that there are two regions of a state,one where car theft is high and the other where car theft is very low.The state allows insurance companies to charge different premiums (which include insurance against vehicle theft)based in part on where the driver lives.Suppose the government is considering a policy change that would make it illegal to charge higher premiums to people in the areas of higher car theft.
(a)Assume that all drivers in the state are very risk averse when it comes to insurance against theft and that the insurance firms offer one rate to all drivers in that state.What kind of equilibrium will result? Who,if anyone,will pay a risk premium? Who will be better off,and who will be worse off?
(b)What might happen if the drivers in the areas of low car theft were not very risk averse?

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Definitions:

Breach Of Contract

The failure to perform any term of a contract, written or verbal, without a legitimate legal excuse.

Frustrated Contract

A contract that, through no fault of either party, is unable to be fulfilled due to unforeseen circumstances, rendering the original terms of the contract void.

Large Tandem Truck

A truck configuration involving two sets of axles at the rear for carrying more weight, commonly used for hauling goods or as part of construction machinery.

Deliberately Destroyed

Intentionally causing something to be ruined or rendered unusable.