Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria. The indifference curves are concave, which represents the fact that consumers want full insurance but also want low premiums.

a. Suppose now that the indifference curves are horizontal. What does this imply about Pcorian preferences? What is the optimal level of insurance under this scenario?

b. Suppose now that the indifference curves are vertical. What does this imply about Pcorian preferences? What is the optimal level of insurance under this scenario?

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Premium a half full Fullness full Figure 11.10. The locus of feasible contracts with moral hazard.