Question

Question 2 (45 pts.) Consider a Rothschild and Stiglitz model of adverse selection in which there are two types of customers (Robusts and Frails). Both types of customers are risk averse in income and have utility function of wealth U (1) = 1-exp (-soo). All customers have initial income of $1,000. During any given year, the probability of becoming ill for the Robust and Frail customers are given by Pr F 0.2, and pR 0.1. If a person falls ill, the cost of treatment is $200 risk-neutral profit-maximizing insurer decides what type of health insurance contract, if any, to offer to its customers. If an insurance contract is purchased, a c customer falls ill, the insurer pays an insurance payout q. ustomer pays the insurer a premium r. If a Customers know their type (Robust and Fail) but the insurer cannot observe any customer's health status. Customers are free to misrepresent their type if it is in their self-interest to do so. a) (4 pts.) Calculate that an individual with U() - 1 ex0 is risk-averse.

the question is not incomplete

Answer 1

(200) 0.6103