Let NI = ($100,000, $500,000) be a person's no insurance wealth bundle. The person has square...

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Let NI = ($100,000, $500,000) be a person's no insurance wealth bundle. The person has square root utility function: U(m) = m1/2. If the person is high risk her probability of loss is p = 0.20 and if the person is low risk her probability of loss is p = 0.10. It is common knowledge 3/4 of the population are high risk types and 1/4 low risk. We will isolate the only candidate for a separating equilibrium. Let C = (hL, d) be the insurance contract meant for the low-risk types and CH = (h, d) be the contract meant for the high-risk types. 1) Determine CH = (h, d) neatly showing your work. 2) Write out the two equations whose solution gives CL = (hL, dL), using the particulars of this problem. 3) Part of the solution of the above two equations is h = $10,606.07. Calculate di. Let NI = ($100,000, $500,000) be a person's no insurance wealth bundle. The person has square root utility function: U(m) = m1/2. If the person is high risk her probability of loss is p = 0.20 and if the person is low risk her probability of loss is p = 0.10. It is common knowledge 3/4 of the population are high risk types and 1/4 low risk. We will isolate the only candidate for a separating equilibrium. Let C = (hL, d) be the insurance contract meant for the low-risk types and CH = (h, d) be the contract meant for the high-risk types. 1) Determine CH = (h, d) neatly showing your work. 2) Write out the two equations whose solution gives CL = (hL, dL), using the particulars of this problem. 3) Part of the solution of the above two equations is h = $10,606.07. Calculate di.

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To determine the insurance contract CH hH dH for highrisk types we need to consider their expected u... View the full answer