a. Prior to actually solving, explain in words what a "lemons problem” is and why this qualifies. b. For part (b) only, suppose that the insurer observes 0. Solve for the unique SPNE in this game of perfect information; the answer will be in terms of 0. c. Now solve for the (sequentially rational) BNE given the insurer doesn't observe 0. d. Explain (in words) how a penalty (or a tax, if you're Justice Roberts) for refusing to buy insurance could solve the lemons problem.
a. Prior to actually solving, explain in words what a "lemons problem” is and why this qualifies. b. For part (b) only, suppose that the insurer observes 0. Solve for the unique SPNE in this game of perfect information; the answer will be in terms of 0. c. Now solve for the (sequentially rational) BNE given the insurer doesn't observe 0. d. Explain (in words) how a penalty (or a tax, if you're Justice Roberts) for refusing to buy insurance could solve the lemons problem.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.5P
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