Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 in he bank those with $5,000 in the bank declare bankruptcy if they get in a accident. In bankruptcy, creditors receive only what individuals have in the bank . What is the actuarily fair price insurance? What price individuals wit $5,000 in the bank willing to pay or the insurance? Will those with $5,000 in the bank voluntarily purchase insurance? What is the effect of state law forcing individuals to purchase auto liability insurance?

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