In the R-S graph, which equation can we use directly to explain that the 45 degree...

In the R-S graph, which equation can we use directly to explain that the 45 degree line is also the full insurance line?

A) q = I_H - I_S

B) I_H = I_S'

C) q = I_H' - I_S
D) I_H ' = I_S

E) I_H' = I_S'

Expert Solution

The answer is Option E.

R-S graph ( Rothschild-Stiglitz model)shows the competitive insurance market. The option IH'=IS' is the equation which directly explain the full insurance. Because the 45 degree line shows the full insured set of the people. In the 45 degree line where the money that the people have non accidential phase is equal to the money the people have at accident phase. IH' shows the equilibrium where the healthy people those who have small premium because they have good health. IS' shows the equilibrium of sick people who have big premium because they have high chance for accident due to poor health. The 45 degree line shows the potential equilibrium which cannot be destructed. So IH'=IS' shows the equality.

Rahul Sunny answered 2 years ago

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