Consider Figure 9.20.

a. Explain why the frail-type indifference curve pictured, U_F, is not a valid indifference curve.

b. Draw your own version of this figure and label two contracts, A and B. Draw the two contracts such that:

• Contract A is strictly better than B, with more income in both states of the world, and

• The customer with the pictured indifference curve nonetheless prefers contract B to contract A.

c. Draw a valid version of a frail-type indifference curve that intersects Ω₁,Ω₂, and the full-insurance line. 

d. Is (Ω₁,Ω₂) a valid separating equilibrium? Defend your answer.

Transcribed Image Text:

Is UF 222 E IH Figure 9.20. Candidate separating equilibrium.