An enterprising Econ 355 student decides she can make money by selling grade insurance to her fellow students. She will pay $500 to any student policyholder who gets an F in the course. Because only 2% of all grades are Fs, she computes that she can break even if she charges students $10. To make a profit, she decides to charge $15.

a.What asymmetric information problems is her business likely to encounter? Explain. (5)

b.Recognizing the problems identified in a) she approaches the professor, asking him to make the insurance compulsory for everyone in the class for a share of the profits. He declines the offer. Why? Explain. (5)