Problem 3 Using the Rothschild-Stiglitz framework developed in class, answer the following questions with reference to the given figure.

a) In the figure below, illustrate the amount of the loss that consumers may suffer.

b) In the figure below, ? refers to an insurance policy. Illustrate the premium charged for the policy.

c) Draw and label indifference curves for low and high risk types through the point ?. Explain, adding to the figure as necessary, why ??cannot be a pooling equilibrium

d) Again, draw and label indifference curves for low and high risk types through the point ?. Illustrate an insurance policy that would be preferred to ? by high risks but not by low risks. Would you expect to see such a policy offered in the marketplace when ? was also available? Explain.

e) Again, draw and label indifference curves for low and high risk types through the point ?. Suppose the government implements a regulation that no insurance policy costing less than ? can be offered. Based on your drawing, can ? be a pooling equilibrium under these circumstances? Why or why not?

W, ZL N W1 = W2 ZH amin V. . . - -. - . .... . - . - .- . -.. E