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An individual has the risk of becoming sick next period, p = 0.5. When sick, the individual earns income Is = 4, and when healthy
An individual has the risk of becoming sick next period, p = 0.5. When sick, the individual earns income Is = 4, and when healthy they earn Ih = 6. In a single graph, complete questions a, b, c, d, and e. (a) Draw and label the endowment point (b) Draw and label the set of full insurance contracts (c) Draw and label the zero profit line (d) Individual has the following utility function over income next period: U = Ih(Is 2). Draw the indifference curve intersecting the endowment point. Solve for and label it's intersection with the 45 degree line. (e) Will insurance contract = (4.5, 4.5) constitute an equilibrium? Explain by determining whether the 3 equilibrium conditions hold
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