26. L -> fair insurance line for low-risk group L C 2 C 1
27. Any contract in the shaded area makes low risk people better off but is not attractive to high risk people. C 2 C 1
28. Point X represents a better contract for the low risk individuals if the bad state of the world occurred. At X the new insurance company will only attract low risk individuals. X C 2 C 1
29. Point X represents a better contract for the low risk individuals if the bad state of the world occurred. At X the new insurance company will only attract low risk individuals. X C 2 C 1
30. The original company will find p a = r a < p h and will be making a loss. X C 2 C 1
31. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
32. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
33. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
34. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
35. As they have all high risk people this company may increase it price to the fair price for those people. X C 2 C 1
36. However at this price even high risk people will find contract X attractive and will switch. X C 2 C 1
37. However at this price even high risk people will find contract X attractive and will switch. This is not what the company the entered the market and offered X wants. X C 2 C 1
38. C 2 C 1 As a result of this the company will have to start increasing the price.
39. C 2 C 1 As a result of this the company will have to start increasing the price.
40. This is where we started. And we already know that this is not a stable equilibrium. C 2 C 1