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6 . A farmer can make a profit of 1 0 0 0 if there is no damage to his crop. But if there is

6. A farmer can make a profit of 1000 if there is no damage to his crop. But if there is damage then his profit is only 300. The probability of the crop getting damaged is 0.25. The farmers utility function is U = ln Y , where Y is profit. The farmer can purchase insurance against loss q at premium rate \pi .[Premium rate \pi means: to insure 1 worth of income the individual pays a premium of \pi .]
(a) Find the highest premium rate \pi at which the farmer would buy full insurance (against the entire loss).
(b) Suppose there is only one insurance firm. Find the premium rate \pi that maximizes the firms expected profit.
(c) Suppose that a new insurance firm enters the market. Let \pi 1 denote the premium rate offered by the incumbent firm and \pi 2 by the new firm. The farmer chooses the firm that offers the lowest premium rate. Find the equilibrium premium rates.

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