Consider Julie with a current wealth of 100.000 who faces the prospect of a chance of losing her 20.000 car through theft next year. In particular, the probability of having her car stolen depends on where she lives; In high-risk areas, the chance is pH = 0.25 while in low-risk areas is pl = 0.15. Julie's preferences can be described by the utility function u(w) = ln w. The market for insurance is competitive and there are no admin costs. a. Suppose that any insurance company in the market can observe where Julie lives (full information scenario). What are the possible contracts offered to Julie? (10%] b. Suppose that the insurance companies are not able to observe where Julie lives (incomplete information case). i. Illustrate graphically the possible separating equilibrium. [15%] ii. Write the constraints which are required to hold in order to offer contracts which can separate types in equilibrium. Explain in your own words the economic intuition. [25%] Consider Julie with a current wealth of 100.000 who faces the prospect of a chance of losing her 20.000 car through theft next year. In particular, the probability of having her car stolen depends on where she lives; In high-risk areas, the chance is pH = 0.25 while in low-risk areas is pl = 0.15. Julie's preferences can be described by the utility function u(w) = ln w. The market for insurance is competitive and there are no admin costs. a. Suppose that any insurance company in the market can observe where Julie lives (full information scenario). What are the possible contracts offered to Julie? (10%] b. Suppose that the insurance companies are not able to observe where Julie lives (incomplete information case). i. Illustrate graphically the possible separating equilibrium. [15%] ii. Write the constraints which are required to hold in order to offer contracts which can separate types in equilibrium. Explain in your own words the economic intuition. [25%]