Consider the model of competitive insurance discussed in lectures (Topic 6.7).
Peter is a risk averse individual with the utility function u(w) w^0.5. His current wealth is $300 and with probability 1/2 he will incur a loss of D = $240, but with probability 1/2 he will incur no loss.
Ann has the same utility u(w) = w^0.5 and current wealth $300 as Peter, but a different probability of loss: she will incur a loss of D = $240 with probability 1/4, and no loss with probability 3/4.
As we showed in lectures, in the separating equilibrium Peter is offered actuarially fair full insurance contract, so his wealth is equal to $180, whether loss happens or not. Ann will be offered an insurance contract with the amount of insurance (approximately) equal to
A. 0
B. 20
C. 50
D. 80
E. 120
F. 240
