An insurance company offers doctors malpractice insurance. Assume that malpractice claims against carefuldoctors cost $5,000 on average over the term of the policy and settling malpractice claims against recklessdoctors costs $30,000. Doctors are risk-neutral and know whether they are reckless or careful, but theinsurance company only knows that 10% of doctors are reckless. How much do insurance companies have tocharge for malpractice insurance to break even?a. $5,000b. $7,500c. $27,500d. $30,000DAn employer faces two types of employees. Regular workers are 70% of the population and generate $100,000in productivity. Exceptional workers are 30% of the population and generate $120,000 in productivity.
Employees know their types and reject salaries below their productivity. If the employer offers a salary equalto the average productivity in the population, what will be the employer’s per-employee profit?
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