We discussed in the lecture that an insurance buyer would choose an insurance policy to maximizes its expected utility, subject to the insurance supply line.Please refer to the lecture note for the model setup and the economic meaning of the notations used below:

MaxEU(b,W1,W2)=(1b)U(W1q)+bU(W1dq+q)

Use the above model to explain:

a) When the insurance market is perfect competitive, how much insurance coverage a buyer wants to buy and the insurance premium charged by the insurance seller?Please illustrate your answers with the model. (5 points)

b) When the insurance market is not perfect competitive, which means insurance sellers can enjoy a positive profit, how much insurance coverage a buyer wants to buy and the insurance premium charged by the insurance seller.Please illustrate your answers with the model.Explain carefully your steps and logic. (Hint: If profit for insurance sellers is positive, what is the relationship between

andb?

>bor

or=b ?)(15 points)