Consider a competitive insurance market. There are two types of individuals, and there is the same number of each type. The probability that one type has an accident is 1/3, and the probability is 1/10 for the other type. Each individual has a utility function defined over wealth and given by √? where ? is wealth. Without insurance, if there is no accident, the individual wealth is $25,000, but if there is an accident $9,000 are destroyed. This is true of either type. Which of the following statements is false? A. If there is full information, H types pay a premium of $3,000 and L types pay a premium of $900. B. If there is private information about types, the menu of contracts of full information will generate losses for the firms. C. If there is private information about types, at equilibrium L types pay a premium of $78.06. D. If there is private information about types, the pooling contract offering $23,050 in each state attracts all the consumers.
Consider a competitive insurance market. There are two types of individuals, and there is the same number of each type. The probability that one type has an accident is 1/3, and the probability is 1/10 for the other type. Each individual has a utility function defined over wealth and given by √? where ? is wealth. Without insurance, if there is no accident, the individual wealth is $25,000, but if there is an accident $9,000 are destroyed. This is true of either type.
Which of the following statements is false?
A. If there is full information, H types pay a premium of $3,000 and L types pay a premium of $900.
B. If there is private information about types, the menu of contracts of full information will generate losses for the firms.
C. If there is private information about types, at equilibrium L types pay a premium of $78.06.
D. If there is private information about types, the pooling contract offering $23,050 in each state attracts all the consumers.
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