The employer offers one insurance contract to all employees, and charges them an initial premium at time 𝑇 = 1 equal to

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The employer offers one insurance contract to all employees, andcharges them an initial premium at time 𝑇 = 1 equal to 𝑃 = 10.After 𝑇 = 1, for all subsequent periods the employer chargesemployees a premium that equals the average cost of the people whobuy insurance in the previous year. Think about the graphicalframework for adverse selection we studied in Class 6. Assume thatconsumer demand is characterized by:𝑃 = 25 ― 0.8 𝑄and assume that marginal and average cost are characterizedby:𝑀𝐶 = 25 ― 1.2 𝑄𝐴𝐶 = 25 ― 0.6 𝑄Suppose that there are 20 consumers, and that demand exceedsmarginal cost there, so that:𝑄𝑚𝑎𝑥 = 20(If you like, imagine Q indexing thousands of consumers.)