2. (24 marks) Consider a competitive insurance market for which the demand side comprises risk-averse agents who have identical well-behaved preferences over consumption x which are represented by the utility function u(x). For each agent, xg denotes consumption in the good state and xp denotes consumption in the bad state, where these are the only two states possible. If the good state arises, then consumption is xg = g; otherwise, the bad state arises and consumption is xp = p 8. Refer to such agents as d-types and 0- types, respectively. Expected consumption is Eg(x) and Eg(x) for 8-types and 0-types, respectively. Similarly, expected utility is Es[u(x)] and Eq[u(x)] for S-types and 0-types, respectively. The insurance industry offers only actuarily fair policies (p,c) where p is the premium and c is the coverage, with both quantities measured in units of x. d. Suppose that agent type is observable to insurance firms (i.e. there is no adverse selection). In a diagram with x, measured on the horizontal axis and xp measured on the vertical axis, illustrate the efficient outcome, where consumption is (x640746,8) for 8-types and (x8,0 x6,e) for 6-types, which is also the symmetric information equilibrium due to the absence of adverse selection. In the diagram, label the attained indifference curves as us and u for 8-types and 0-types, respectively. Ensure the diagram is sufficiently large so as to accommodate additional elements introduced by subsequent parts of the question. 2. (24 marks) Consider a competitive insurance market for which the demand side comprises risk-averse agents who have identical well-behaved preferences over consumption x which are represented by the utility function u(x). For each agent, xg denotes consumption in the good state and xp denotes consumption in the bad state, where these are the only two states possible. If the good state arises, then consumption is xg = g; otherwise, the bad state arises and consumption is xp = p 8. Refer to such agents as d-types and 0- types, respectively. Expected consumption is Eg(x) and Eg(x) for 8-types and 0-types, respectively. Similarly, expected utility is Es[u(x)] and Eq[u(x)] for S-types and 0-types, respectively. The insurance industry offers only actuarily fair policies (p,c) where p is the premium and c is the coverage, with both quantities measured in units of x. d. Suppose that agent type is observable to insurance firms (i.e. there is no adverse selection). In a diagram with x, measured on the horizontal axis and xp measured on the vertical axis, illustrate the efficient outcome, where consumption is (x640746,8) for 8-types and (x8,0 x6,e) for 6-types, which is also the symmetric information equilibrium due to the absence of adverse selection. In the diagram, label the attained indifference curves as us and u for 8-types and 0-types, respectively. Ensure the diagram is sufficiently large so as to accommodate additional elements introduced by subsequent parts of the