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Question 7' [25 marks] Consider a competitive car insurance market. Half of the population consists of good drivers and the other half consists of bad drivers. Insurance providers cannot observe whether a driver is good or bad. Suppose each driver has 2150 to spend. The prob- ability that a good driver is in an accident is 1/5, while the probability that a bad driver is in an accident is 4/5. An accident would cost the driver 140 in repairs. All drivers have the same preferences, represented by the utility function Mm) = 111(m), where m. denotes money. (a) Show that an adverse selection problem can occur in this scenario. (b) Find a self-selection menu of insurance policies that resolves this adverse selec- tion problem. (0) Explain why resolving this adverse selection problem is socially desirable