The Rothschild-Stiglitz model and its discontents. Imagine policymakers in the fictional nation of Pcoria are trying to create a Pcorian National Insurance Program (PNIP) that will bring full insurance to all the citizens of Pcoria. A Rothschild- Stiglitz diagram of the Pcorian insurance market. a Figure 9.21 depicts the current state of the insurance market in Pcoria before the plan is implemented. The insurance market had settled into a separating equilibrium at (A,C). Explain why no insurance company enters with a contract at point B. b Draw your own version of the Pcorian Rothschild-Stiglitz diagram and draw a robust-type indifference curve that passes through point C. Remember that the separating equilibrium is valid, so make sure your indifference curve does not contradict that assumption. c Suppose PNIP establishes a new national pooling contract at point P, and bans any private insurance company from offering any other contract. Assume both frail and robust consumers decide to join the contract at P. Draw another robust-type indifference curve through P that is consistent with this assumption. d Is this policy change a Pareto-improvement? e A robust Pcorian citizen named Hercules sues PNIP because he says the new insurance rules are harming him. Due to the explosive nature of the case, it goes straight to the Pcorian Supreme Court. The chief justice asks Hercules how PNIP could possibly be harming him if he went from having barely any insurance (point C) to full insurance (point P). How should Hercules respond? f The Pcorian Supreme Court issues an opinion that the ban on private insurance is unconstitutional, but that the PNIP can continue to operate. Hercules decides to go into business for himself and start a health insurance company. Where can he place his new contract so that it skims off the robust Pcorians, leaves the frail Pcorians in the PNIP, and makes a profit? Draw his contract (point Z) on your diagram. g Suppose Hercules is successful. The PNIP starts losing billions of dollars a year and is shut down by the Pcorian government. For a moment, Hercules's contract Z is the only contract available. Is there any place that a new insurance company can enter and earn positive profits?