Problem
Assume there are two equally likely types in a market, risky drivers and safe drivers. On average, it costs insurers $1000/yr to insure risky drivers, and $500/yr to insure safe drivers. Assume risky drivers value insurance at $1200/yr and safe drivers at $600/yr.
1. With both types being equally likely, what price do insurers have to charge to breakeven?
2. What is the result in this market if insurers charge the price you found in a? What is this outcome called?
3. What is the most a safe driver would pay to accurately demonstrate their type to insurers?