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3] [40%) Now coffee shop owners have a choice whether to be observant or negligent Negligent owners have utility over income [y] in either state given by: n (y) = . bservance takes effort in the form of taking precautions to make sure that the electrical appliances and wiring are up to code. This effort results in a utility in each state of the world ofuob!) = 0.9.1}. The risk ofre is equal to .2 if owners are observant and equal to .6 if they are negligent 1il"'c.n"hile the owners know the risk of re in their own coffee shops, the competitive insurance companies don't know whether owners exert effort andtake precautions or not. Coffee shop owners receive an income of IUD from the business if there is no re, and have no income [a nancial loss of 100] in the event of a re. Note: If you get stuck in your analytical results, draw the appropriate graphs in the statecontingent space to receive partial credit. a) Are owners observant in the absence of insurance? Support your answer with calclations. b] Show that owners, given a choice between full coverage at the actuarily fair premium for negligent owners and no insurance, prefer to be observant and not buy insurance. c] Find the equilibrium insurance contract assuming that insurance companies are competitive and cannot observe whether owners act responsibly. (Hint: the coverage should be [after rounding) $63.3?) d] Suppose the government conducts inspections of whether the coffee shop owners conform with the building codes and sets a ne that makes coffee shop owners observant. The cost ofinspection is not born by coffee shop owners. In the presence of this policy, which equilibrium contract would competitive insurance companies offer