(solution) State Auto Insurance Pool. Consider a state in which automobile drivers are divided equally into…

(solution) State Auto Insurance Pool. Consider a state in which automobile drivers are divided equally into…

State Auto Insurance Pool. Consider a state in which automobile drivers are divided equally into two types of drivers: careful and reckless. The average annual auto insurance claim is $400 for a careful driver and $1,200 for a reckless driver. Suppose the state adopts an insurance system in which all drivers are placed in a common pool and allocated to insurance companies randomly. An insurance company cannot refuse coverage to any driver it is assigned, but a driver who is unhappy with the insurance company has the option of being randomly reassigned to another insurance company. By law, each insurance company must charge the same price to all its customers. Predict the price of auto insurance under the two alternative policy scenarios: a. Under Policy M, auto insurance is mandatory. b. Under Policy V, auto insurance is voluntary