Suppose that every driver faces a 3% probability of an automobile accident every year. An accident will, on average, cost each driver $9,000. Suppose there are two types of individuals: those with $54,000.00 in the bank and those with $4,500.00 in the bank. Assume that individuals with $4,500.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse.

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