Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of
Question:
Consider Figure 11.10, which shows the locus of feasible contracts for the population of the nation of Pcoria.
a. In which corner of this diagram (northeast, southeast, northwest, or southwest) is utility highest for consumers? What prevents insurance companies from offering contracts in this corner?
b. On your own version of Figure 11.10, plot new points to represent where the market would be under
(i) a nationally mandated full insurance policy and (ii) an insurance ban.
c. Would a nationally mandated full insurance policy be optimal for Pcoria? What about an insurance ban?
d. Suppose the devil approaches the newly elected President of Pcoria with an unusual bargain. He offers to magically eliminate moral hazard, but in return Pcoria must forbid contracts that are more than half full. On a new version of this figure, draw a new locus of the contracts that would be feasible if the President takes the devil’s bargain.
e. Should the President take the devil’s bargain?Why or why not?
f. The indifference curves in Figure 11.10 represent one possible set of preferences for Pcorian society. On a new figure, draw an alternative set of indifference curves such that the bargain is a good deal relative to the status quo.
g. Which type of society is more likely to accept the devil’s bargain: one that is relatively risk-neutral or one that is relatively risk-averse? Explain why your answer makes intuitive sense.
Step by Step Answer:
a The highest utility for consumers would be in the northeast corner of the diagram where both the premium and fullness are high Insurance companies a...View the full answer
