1.This question is on mobile phone insurance. There are twenty low-risk people in a town and twenty high-risk people. A low-risk person has an expected cost of $60 from damage/theft of their phone each year and is willing to pay $100for insurance (they are risk averse). A high-risk person has an expected cost of $150 each year and is willing to pay $200 for mobile insurance. Insurance companies are perfectly competitive so they are willing to offer insurance at a price where they break even - i.e. they will sell insurance at a price equal to the expected value of the amount they will pay out (a fair price). However, they are unable to tell who is high-risk and who is low-risk.

a) If the firm offers insurance at $100who buys it?

b) Calculate the firms expected profits for insurance sold at $100.

c) If the firm offers insurance at $200 who buys it?

d) Calculate the firms expected profits for insurance sold at $200

e) Can a firm offer a single price such that the firm makes non-negative profits? Explain.

f) Given your answers above and the fact that perfectly competitive firms will offer a "fair price" for insurance, who gets insurance and who doesn't. What kind of problem is this?

g) If the company forced everyone who buys the phone to buy it with insurance, at what price would firms provide insurance?

h) Who would benefit and who would lose out from this policy?