Suppose that left-handed people are more prone to injury than right-handed

people. Lefties have an 80 percent chance of suffering an injury leading to a

$1,000 loss (in terms of medical expenses and the monetary equivalent of pain

and suffering) but righties have only a 20 percent chance of suffering such an

injury. The population contains equal numbers of lefties and righties. Individuals

all have logarithmic utility-of-wealth functions and initial wealth of $10,000.

Insurance is provided by a monopoly company.

(a) Compute the first best for the monopoly insurer (i.e., supposing it can observe

the individual's dominant hand).

(b) Take as given that, in the second best, the monopolist prefers not to serve

righties at all and targets only lefties. Knowing this, compute the second-best

menu of policies for the monopoly insurer.