22 2. Consider the problem above and answer the following questions that are on market failure in the presence of asymmetric information in insurance markets. Part (a) is on moral hazard and part(b) is on adverse selection. (a) Suppose Priya took an offer where the insurance company covers all of her losses in the case of fire and she pays a premium of 14,000. Since now her house is fully insured, she becomes more careless so that the probability of fire increases. Now the probability of fire becomes 30 percent. What happens to Priya's expected utility? What happens to the insurance company's expected loss? (b) Suppose each person in an economy owns a house worth 100,000. In case of fire, their home value will be 30,000. Each person's utility function is U (I) = Vi. 22 2. Consider the problem above and answer the following questions that are on market failure in the presence of asymmetric information in insurance markets. Part (a) is on moral hazard and part(b) is on adverse selection. (a) Suppose Priya took an offer where the insurance company covers all of her losses in the case of fire and she pays a premium of 14,000. Since now her house is fully insured, she becomes more careless so that the probability of fire increases. Now the probability of fire becomes 30 percent. What happens to Priya's expected utility? What happens to the insurance company's expected loss? (b) Suppose each person in an economy owns a house worth 100,000. In case of fire, their home value will be 30,000. Each person's utility function is U (I) = Vi