Using the Rothschild-Stiglitz framework developed in class, answer the following questions with reference to the given figure. Please explain your answers carefully on a separate sheet of paper but include the marked-up figures

a) Suppose that a law is passed that prohibits insurance policies with a net payout lower than ?2 min in the bad state. Could this law lead to a stable pooling equilibrium where the offered insurance policy provides full insurance?

b) Given the law described in (a), could a stable pooling equilibrium at policy ? result?

c) Suppose that the law described in part (a) were in effect and consider potential policies ? and ?. Is it possible that both risk types might prefer ? to ??

d) Given your above answers, evaluate whether this law will result in a pooling equilibrium in the insurance market. Explain carefully.

W2 Z ZL W = W2 W1 ZH E W