HI there, I missed one of my classes and cant figure out how to do e-j. Can you help?

ECON 452 202001 ...term assignment (1) - Saved /Ol Economics 452 (A01), CRN 21051 Midterm assignment Dr. L Welling February 28, 2020 Total value: 70 marks DUE DATE: Wednesday, March 4, by noon (in mm class) Note: I have modified this question somewhat to clarify the questions. IF you choose to hand in this assignment, you will be marked on parts (e) (i) inclusive. Total value is 37. | Part B 1. Remember to show your calculations. 2. If you are stuck on one part of this question, try to answer the rest by explaining how you would answer them if you had answered the previous questionisL Considerthe following moral hazard insurance model. Consider an individual who has an initial wealth W0 : $100 who faces a possible loss of $51. The loss will occur with a probability that depends on the individual's choice of effort. There are two possible levels of effort, 3 : l] and e : 1. The individual's utility is a function of both wealth and effort, and is given by U(w,e) : W 7 11(9), where 11(9) is the disutility of effort, and 11(0) : 0 and 51(1): 1/3. Finally, suppose that the loss probabilities are given bythe following table: no loss loss = 51 e : 0 1/3 2/3 a = 1 23 1:3 a) (5) Which effort level will the individual choose if no insurance is available? Suppose now that this individual has access to actuarially fair insurance, and effort is observabie. b) (3) What will be the cost of full insurance for each level of effort? c) (5) Will the individual purchase insurance in this market? Why or why not? d) (3) Which policy would the individual prefer? Explain briey. e) [6) Is the insurance market efficient? Explain briey. Suppose now that an insurance company cannotobserve the individual's effort choice. Insurance is still actuarially fair. f] (5] Will the policy preferred by the individual when effort is observable be available when effort is not observable? Briefly explain why or why not. g) (6] Explain how you would determine the optimal policy given this asymmetric information. How does it compare to the policy preferred by the individual when effort is observable? h) (5) Compare the company's profits when effort is observable, and when it is not. i) (6) Compare the individual's utility when effort is observable, and when it is not. j) (6] What is the social cost of asymmetric information in this case, and who bears this cost? Ill 0 <