5 Assignment ONF - Word File Home Insert Design Layout Raferences Mangs Raview View Tell me what you want to do... Share Question 3 Assume that in the market for insurance, CONSULLICTS are the same in every respect, and differ only in respect of the cxogenous probability that they have an accidcut. For consumer i, the probability of luaving an accident is a [0,1]. The probability is such that i - 1 for low risk and i - 2 lur low risk. Each consulter lsa VNM utility function (w), where w is their wealth, In the event of an accident occurring, the consumer lose X. Similarly, insurance companies are identical and all soll full insurance only. Under any full insurance contract, the company puys X in the event of an accidcut but zero otherwise. The cost of providing insurance is zero. a) Under symmetric information, what is the Pareto efficient outcome. Explain your answer. b) What are the 2 key differences that insurance companies face when information is asymmetric c) Derive the equilibrium price uncler asymmetric inloration, and explain why only these consumers who are certain to have an accident will puntuase insurance, Page 1 of 2 334 wurus [ Chish (United States + 100% 4:57 pm O Bi 08/11/2020 5 Assignment ONF - Word File Home Insert Design Layout Raferences Mangs Raview View Tell me what you want to do... Share Question 3 Assume that in the market for insurance, CONSULLICTS are the same in every respect, and differ only in respect of the cxogenous probability that they have an accidcut. For consumer i, the probability of luaving an accident is a [0,1]. The probability is such that i - 1 for low risk and i - 2 lur low risk. Each consulter lsa VNM utility function (w), where w is their wealth, In the event of an accident occurring, the consumer lose X. Similarly, insurance companies are identical and all soll full insurance only. Under any full insurance contract, the company puys X in the event of an accidcut but zero otherwise. The cost of providing insurance is zero. a) Under symmetric information, what is the Pareto efficient outcome. Explain your answer. b) What are the 2 key differences that insurance companies face when information is asymmetric c) Derive the equilibrium price uncler asymmetric inloration, and explain why only these consumers who are certain to have an accident will puntuase insurance, Page 1 of 2 334 wurus [ Chish (United States + 100% 4:57 pm O Bi 08/11/2020