Review Figure 9.18, which depicts a separating equilibrium breaking down. In this figure, the separating equilibrium breaks down because the zero-profit line is too far to the right. But this is not the only way that a separating equilibrium can fail.

a. Draw a version of the Rothschild–Stiglitz model where a separating equilibrium holds, but just barely (the robust-type indifference curve should almost touch the aggregate zero-profit line).

b. Imagine that all the robust types in the insurance market suddenly become much more risk-averse. How would this change the shape of their indifference curves?

Show how this change can unravel the separating equilibrium.

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Is 521 223 -UR UF → H