There are two groups, each with a utility function given by U(M)=sqrt(m), where M=144 is the initial wealth level for every individual. Each member of group 1 faces a loss of 44 with probability 0.5. Each member of group 2 faces the same loss with probability .1.

a) What is the most a member of each group would be willing to pay to insure against this loss?

*20.There are two groups, each with a utility function given by where

M

144 is the initial wealth level for every individual. Each member of group 1 faces aloss of 44 with probability 0.5. Each member of group 2 faces the same loss withprobability 0.1.a.What is the most a member of each group would be willing to pay to insure againstthis loss?b.If it is impossible for outsiders to discover which individuals belong to which group,how large a share of the potential client pool can the members of group 1 be beforeit becomes impossible for a private company with a zero-profit constraint to provideinsurance for the members of group 2? (For simplicity, you may assume that insur-ance companies charge only enough in premiums to cover their expected benefit pay-ments and that people will always buy insurance when its price is equal to or belowtheir reservation price.) Explain.

a) What is the most a member of each group would be willing to pay to insure against this loss?

*20.There are two groups, each with a utility function given by where

M

144 is the initial wealth level for every individual. Each member of group 1 faces aloss of 44 with probability 0.5. Each member of group 2 faces the same loss withprobability 0.1.a.What is the most a member of each group would be willing to pay to insure againstthis loss?b.If it is impossible for outsiders to discover which individuals belong to which group,how large a share of the potential client pool can the members of group 1 be beforeit becomes impossible for a private company with a zero-profit constraint to provideinsurance for the members of group 2? (For simplicity, you may assume that insur-ance companies charge only enough in premiums to cover their expected benefit pay-ments and that people will always buy insurance when its price is equal to or belowtheir reservation price.) Explain.

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