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Mandatory Insurance. Consider a city with 100 drivers and a perfectly competitive market for automobile
insurance. The demand curve for auto insurance is linear and negatively sloped, with a slope of $10 per customer. At the initial price of $1,500, half the city s drivers (50 drivers) buy insurance. The price is just high enough to cover all the costs of providing insurance, including a 50 percent premium to cover the costs associated with uninsured drivers. Suppose the city makes auto insurance mandatory.
Predict the new equilibrium. (Related to Application 4 on page 631.)