Consider a pool of potential consumers of insurance with a known probability of sickness, p=0.5. Also consider that there are many competitive insurance firms that operate in the same manor, with the same operating costs. A. In the IH/IS space, show a random endowment point, E, the zero-profit line (calculate the slope), a full insurance line and an indifference curve that contains point E. Show the set of feasible contracts and explain what conditions hold that make the contracts feasible. B. On your graph, label equilibrium point Z. Why is equilibrium at point Z?
Consider a pool of potential consumers of insurance with a known probability of sickness, p=0.5. Also consider that there are many competitive insurance firms that operate in the same manor, with the same operating costs. A. In the IH/IS space, show a random endowment point, E, the zero-profit line (calculate the slope), a full insurance line and an indifference curve that contains point E. Show the set of feasible contracts and explain what conditions hold that make the contracts feasible. B. On your graph, label equilibrium point Z. Why is equilibrium at point Z?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider a pool of potential consumers of insurance with a known probability of sickness, p=0.5. Also consider that there are many competitive insurance firms that operate in the same manor, with the same operating costs.
A. In the IH/IS space, show a random endowment point, E, the zero-profit line (calculate the slope), a full insurance line and an indifference curve that contains point E. Show the set of feasible contracts and explain what conditions hold that make the contracts feasible.
B. On your graph, label equilibrium point Z. Why is equilibrium at point Z?
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