### Who will get insured and what will the premiums be

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##### Reference no: EM133341625

Question: There are two kinds of consumers who are looking to buy auto insurance from an insurance firm - Reckless drivers (R) and Safe Drivers (S). 50 percent of the consumer population is R and 50 percent is S. The insurance company's cost of servicing a consumer is \$80 if she is a safe driver and \$120 if she is a reckless driver. The value of the insurance is \$100 to S and \$150 to R. Observable Types Suppose the insurance company can observe whether a consumer is reckless or safe.

a) Who will get insured and what will the premiums be?

b) What are the profits to the insurance company?

c) Is this outcome efficient?

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