Each customer in a market for insurance has an initial wealth of W = $10,000 and a utility function U =W0.5. Each member of group 1 faces a 10% chance of losing $3,600. Each member of group 2 faces a 20% chance of losing $3,600. Insurance is sold in a competitive market in which the price is driven down to expected cost. There are no administrative costs of providing insurance, so an insurer's only costs are its expected benefit payments. A) What is the maximum amount a member of group 1 is willing to pay for full insurance against their loss? B) If 75% of the population are members of group 1, but it is impossible for an insurer to discover which group an individual belongs to, will it be possible for members of group 1 to insure against their loss? Explain. C) Now suppose that insurance companies have a costless, but imperfect test for identifying the group a person belongs to. If the test says that a person belongs to a particular group, the probability that she really belongs to this group is x (x < 1). How large must x be to alter your answer in b? [Hint: If the test reports that a person belongs to group 1, what is the expected cost of insuring that person?]