Question: Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has income $360 under good and $90 under bad outcome.

Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has income $360 under good and $90 under bad outcome. The probability of good outcome is 5/9 (so the probability of bad outcome is 1 5/9 = 4/9). The individual can buy any non-negative x units of insurance. Every unit of insurance has price $p and it pays $1 in the event of bad outcome.

(a) Suppose the unit price of insurance is p = 1/2. Determine if the insurance market is competitive or not.

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