(C) Finally, let's analyze the equilibrium. (i) We haven't considered the case where only low-risk people buy insurance. Why isn't this a possible equilibrium? (ii) The scenarios considered in (A) and (B) can only be an equilibrium if it is possible for the insurance company to not lose money. Based on your previous answers, in equilibrium who will buy insurance? Will that equilibrium be Pareto efficient? (iii) Suppose the government subsidizes health insurance (i.e. imposes a negative tax on all consumers). How large must the subsidy be, in order for there to exist a price for which everyone chooses to buy health insurance and the insurance company doesn't lose money?Health insurance and adverse selection. Insurance companies sells health insurance to two types of people: lowrisk people and high-risk people The probability that a random person is low-risk is 315 [and so the probability that a random person is high-risk '5 also 1]. 2 Ir low-risk people: have on average $4M of medical expenses each year, and are willing to pay mm for medical insurance o high-risk people: have on average 511001] of medical expenses each year, and are willing to pay Slld for medical insurance People lmow whether they are low-risk or highrisk, but insurance companies do not. [A] Let's start by considering a scenario where everyone buys insurance. {i} What is the highest price of health insurance for which both highml: and lowrisk people will buy the insurance? {ii} What is an insurance company's expected prot per person1 at the price you found in {i}? {B} Now let's consider a scenario where only highrisk people buy insurance {i} What is the highest price of health insurance for which high-risk people will buy the insurance? {ii} What is thc insurance company's expected prot per person, if it charges the price in [i]