Question

LoJack and Insurance Companies. Consider the application "External Benefits from LoJack. Suppose that all vehicles in a state carry theft insurance. The benefit from reduced vehicle theft they replace fewer stolen vehicles Insurance companies do not offer any discounts for customers who install LoJack. The cost of LoJack is $100 per vehicle per year. The external benefit from LoJack per year. To simplify matters, assume that the private benefit of LoJack is zero, so the social benefit equals the external benefit a. Suppose a single insurance company provides automobile insurance to all vehicles in the state Will the insurance company provide free LoJacks to at least some of its customers? A. Yes, because the entire $1,300 marginal social benefit of Lojack goes to the insurance company OB. No, because none of the $1,300 marginal social benefit of LoJack goes to the insurance company OC. Yes, because a majority of the $1,300 marginal social benefit of LoJack goes to the insurance company OD. No, because the $1,300 marginal social benefit of LoJack is outweighed by LoJack's marginal cost b. Suppose that there are 20 companies in the state, each with a market share of 5 percent. Will the insurance company provide free LoJacks? No Enter your response as an the number at which each insurance company will be indifferent about providing free Lojack systems c. What is the threshold number of insurance companies

Answer 1

a) Solution: Yes, because the entire $1,300 marginal social benefit of LoJack goes to the insurance company

Explanation: The insurance company will give free LoJacks to at least few customers because social benefit and the external benefit are equal; and the entire amount of 1,300 LoJack's MSB goes to the insurance company

b) Solution: No

Explanation: When there 25 companies with 4% market share for each if insurance company provide free LoJacks it will face losses

c) Solution: 13

Explanation: The insurance company will be indifferent at: Social benefit ( i.e. External benefit) / Cost per vehicle = $1300/ $100 per vehicle = 13