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When a small car ("Economy"-"E") collides with a larger car ("SUV"-"S") passengers in the E are put at greater risk. However, when an E collides with another E damags are minimal, whereas when an SUV collides with another SUV the damages are higher. The payoff in terms of absolute value of expected losses are as follows: (E,E)=(1,1) (E,S)=(10,2) (S,E)=(2,10) (S,S)=(2,2). Let p be the proportion of drivers who choose to drive an SUV. If drivers want to minimize their expected losses (they are risk averse), use a graph to characterize all equilibrium in this society. Do all these equilibrium maximize overall welfare (in the sense that they minimize overall losses for society)? What does this mean for the overall welfare for society?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91236175

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